Property funds - flavour of the month

Posted On Friday, 01 July 2011 02:00 Published by eProp Commercial Property News
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Last year more money about R4,5bn was invested into real estate funds, than into equity R4bn unit trusts, there are now 22 real estate funds for just 19 shares in the sector.

Mohamed KallaStephen Cranston

Property still popular with retail clients

A hurdle rate of 13,5% is realistic

“We believe that yields on property of 7%-8% are way too low for the risks involved, as inflation will be similar”

— SIMON PEARSE

Last year more money was invested into real estate funds (R4,5bn) than into equity unit trusts (barely R4bn).

There are now 22 real estate funds for just 19 shares in the sector. With a meaty R28,8bn in the funds, there are arguably signs of a bubble. There seem to be parallels with the popularity of small cap and technology funds in the past.

To some extent, the funds are being bought on past performance, which has been impressive. The top performer, the Stanlib Property Income fund, has given a total return of 98,8% over the past three years — a period that includes the slump from the global financial crisis in September/October 2008.

The worst performer, Marriott Property Equity, still gave a 40,7% return, even though it went through almost the entire period 50% invested in cash.

As the SA property sector has a market cap of R130bn (little more than the market cap of FirstRand) most property funds reserve the right to close to new investors. Stanlib’s fund, with R3,4bn under management, closed to new investment from September 2010 until May. It has reopened as there have been a number of new listings, such as Investec Property Fund and Rebosis, which have added liquidity to the market.

But with about R14bn in property assets, including its institutional clients, Stanlib would have a problem liquidating positions in certain shares in the event of a crash.

Fund managerc says investors need to take a long-term view. Unlike many of the overheated shares in the small cap fad, property shares are made up of tangible assets which have predictable earnings streams.

“We are not expecting the next 12 months to be easy for property but we are expecting 6% income growth, giving a forward yield of 8,5%. This is attractive when compared with the 8,3% yield to maturity on the 10-year government bond and when you consider that individual investors would be lucky to get a 5% return on cash.”

The yield in the hands of the real estate fund unit holder will be closer to 7% as there is a 1%-1,5% charge from the fund manager for managing the portfolio. The fund managers might be hard pressed to get business if there were a cheap and accessible exchange traded fund. But the only option at this stage is Proptrax, which charges a fee of 0,7%. It also has quite a high tracking error to the SA property index. It is not easy, for example, for Proptrax to reinvest money into property funds when they make payouts. Perhaps a better way for investors to invest in a proxy for the index is through the Prudential Enhanced SA Property Tracker. This takes small bets against the index and charges an allin fee of 1%, including 0,3% it pays as a trail fee to financial advisers.

Arguably, investors should pick a diversified property fund, buy it on the JSE and avoid paying fees to the managers.

Marriott CEO Simon Pearse says that Growthpoint, for example, is already a well diversified fund in its own right, with a good management team. “There is a strong case for investing discretionary money into one or two diversified shares.”

But he says most of Marriott’s clients invest in its funds from their nondiscretionary money, retirement annuities and living annuities post retirement, which needs to be invested into openended unit trusts and not shares.

Marriott pioneered the property fund sector in September 1996, when the market cap of the sector was barely R7bn. But at the time listed property shares were giving a yield of 16%-18%.

“We could see that this would be a fantastic yield for people who need annuity income. In the short term we did not look so clever, as yields rose to 20% [leading to capital losses] in 1998, but investors did extremely well over the subsequent decade.”

Pearse has been the Cassandra of the sector as he has been negative on property for about five years.

“We believe that yields on property of 7%-8% are way too low for the risks involved, given that we expect inflation to be at around that level on average over the next decade.”

At these levels, Pearse argues, inflation-linked bonds provide a more attractive investment to retired people who need to protect their incomes.

“We can buy quality international real estate funds such as Stockland Trust and Allied Properties on similar yields to the local shares.”

Catalyst SA Property Fund manager Paul Duncan believes that property should provide a 3% risk premium to government bonds and on top of that there should be 2% for listed property.

“Shareholders are standing behind the debt of the company itself as well as the direct gearing on the properties. Right now the hurdle rate [the minimum return that investors require] for property should be about 13,5%.”

Duncan says the income stream of property companies can be predicted with reasonable accuracy. “It is a good proxy for the income of commercial property in general.”

But he argues that nobody can claim to be able to predict the capital growth in the shares, which is subject to volatility similar to the rest of the JSE.

Investors need to decide whether to invest in a fully invested property fund such as Stanlib Property Income — Coronation, Investec and Catalyst also have well-respected funds in this sector — or a flexible fund such as Marriott Property Equity or the Stanlib Multimanager Flexible Property Fund (which is run by Stanlib and Coronation).

Small funds are the most flexible and have the most scope to outperform. Absa Property has R280m under management and there is strong speculation that Mariette Warner has been hired to run this fund. When she ran the Stanlib fund she was the leading manager in the sector.

Another addition to the sector soon will be the Sesfikile property fund, which will be launched on the Sanlam Collective Investments platform soon. The team of Evan Jankelowitz, Mohamed Kalla and Kundayi Munzara has more than enough experience to run a credible fund.

Last modified on Thursday, 24 April 2014 18:24

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