Although investment property is held for the purpose of receiving rental income and potential capital appreciation, different fund types require specific strategies that reflect the investment objectives of its investors, delegates were told at the second quarterly SAPOA / IPD Research Breakfast Forum.

Consideration for the investment horizon, funding and liability matching issues, and most specifically the risk tolerance level of the end investor is important when structuring and managing a property portfolio. Listed funds and unlisted funds such as those forming part of life insurance and pension funds have quite different requirements from their property investments.

IPD Research shows that the structure of the property portfolios of life and pension funds is heavily weighted towards large, good quality shopping centres. This segment of the market has indeed been one of the strongest over the past decade, benefiting the both the returns and risk profile of those funds. Listed property funds, on the other hand, have a higher exposure to the office and industrial sectors. This has helped to boost returns but brings with it additional volatility.

Jess Cleland, Head of Research at IPD South Africa, commented “Fund managers have many tools available to them to achieve their clients’ investment objectives. This research shows that over the past decade listed property funds have invested heavily in growing their portfolios, engaging in activities such as transactions and developments to a greater degree than life and pension funds. These actions carry with them a higher level of risk but also the potential for generating excess returns. Indeed, over the long term, the properties owned by life and pension funds display a lower volatility in returns, but listed funds’ properties have produced higher returns.”

Leon Allison, Research Analyst at Macquarie First South Securities, commented “South African property in general – both listed and unlisted – has experienced an exceptional decade following poor returns during the 1990s. The profile of listed property in particular has risen due to stellar returns, relatively stable income growth, increased size of better quality assets and greater liquidity”.

Allison says “We are finding a general trend of pension funds switching from direct to listed property, as the longer the investment horizon, the less of an issue price volatility becomes. Contractual annual escalations on rental income are driving property returns, and the current uncertain and potentially low growth global environment should be good for SA property in general (listed and direct), due to its defensive qualities”.

Phil Barttram, Head of Research at Old Mutual Property, comments: “OMP Research’s analysis has identified 4 distinct phases of the Direct Property Total Return Cycle namely Growth, Demand Shock, Supply Overhang and Recovery. Our analysis has also shown the impact that delayed economic growth can have on how quickly we move through the Supply Overhang Phase and into the Recovery Phase. While prevailing uncertainties surrounding SA’s economic growth increase the downside risks, the Income Growth drivers of Rental Reversion and Rental Escalations have remained fairly resilient, underpinning our belief that well selected Commercial Property continues to offer a defensive growth opportunity over the medium term”.