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How to receive low-risk returns from property

Posted On Tuesday, 04 May 2004 02:00 Published by eProp Commercial Property News
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A property unit trust (PUT) is a portfolio of investment-grade properties that provides rental income and capital appreciation. PUTs are a simple way for you to invest in property and receive low-risk returns.

Property-Housing-ResidentialInvestors in property unit trusts (PUTs) receive a share of the rental income from a portfolio of properties, while the value of the units increases over the long term as the value of the properties rises.

Unlike most ordinary unit trust funds, PUTs are listed on the JSE Securities Exchange.

Equity unit trusts pool investors' money and invest it in various sectors of the JSE. PUTs acquire a portfolio of properties, which provide investors with an income stream from rentals. Rental streams are more predictable and manageable than the daily volatility of the share markets. This makes PUTs a relatively safe investment.

PUTs are bought and sold by management companies. These companies are responsible both for the day-to-day administration of the properties and their leases, and for the investment strategy of the trust.

History
PUTs were introduced in South Africa in 1969, when two trusts were established and listed on the JSE.

In 1976, a separate sector for PUTs was established on the JSE. The aim was to encourage individuals and small pension funds lacking the inclination or expertise to manage freehold property investments themselves, to invest in property.

PUTs have been listed under the "Real Estate" sub-sector of the JSE since 2002, when the exchange implemented the FTSE-JSE Africa index series and reclassified its sectors.

The Real Estate sector also includes property loan stock (PLS) companies and property holding and development companies.

In terms of the Collective Investment Schemes Control Act (Cisca), PUTs are technically "collective investment schemes in property", but they are still referred to as PUTs because the nature of the investment remains the same as before the Act.

When PUTs started, they bought (physical) property from institutions, such as retirement funds and individuals. By the 1980s, there were about 18 different PUTs.

However, the PUT management companies found that having a myriad of small property trusts competing in the market limited the liquidity that PUTs had hoped to provide. PUTs were not as liquid as had been expected, because mainly institutions and retirement funds invested in PUTs (after having sold off their direct holdings in property).

A spate of mergers took place in the late 1990s to increase the liquidity of the PUT sector. For instance, NIB management company amalgamated its three PUTs into Sycom, a number of PUTs combined to form PLS companies such as Apex, Marriott grouped its four PUTs into one, and Grayprop and Mainpro merged. This consolidation saw the number of PUTs drop to six entities. They are Capital, Emira, Grayprop, Martprop, Prima and Sycom.

Currently, the PUT sector has a market capitalisation of about R6 billion, most of which is concentrated in three large funds - Grayprop, Martprop and Sycom.

PUTs are allowed to borrow up to 30 percent of their market values. Generally, the level of borrowing in the sector is low, with the highest debt level at about 10 percent.

Regulation
As is the case with ordinary unit trusts, PUTs are governed by Cisca under the auspices of the Registrar of Unit Trusts, a Financial Services Board function.

The affairs of PUT management companies are regulated by a trust deed between the company and a trustee. In addition, the JSE imposes the same regulatory requirements on PUTs as it does for securities.

 


Cisca allows PUTs to pass on the income they earn to unitholders (investors) by way of distributions. By law, all the income earned by PUTs, less expenses, must be paid out to investors. Distributions take place bi-annually or quarterly.

Tax
PUT distributions are treated as interest. In terms of current tax legislation, if you are under the age of 65 you are not taxed on the first R11 000 of interest income you earn. If you are 65 or older, the first R16 000 of interest income you earn is not subject to tax. Amounts that exceed these thresholds are taxed at your marginal tax rate.

Similar to equity unit trusts, you will pay capital gains tax on any profits that you from PUTs, although the first R10 000 of gains made from all your investments in any year is exempt from this tax.

Why invest in PUTs
Investors should reduce their exposure to investment risk by investing across the asset classes of equities, bonds, property and cash.

While equities provide capital growth and cash is a low-risk investment, property offers you the best of both worlds. PUTs provide a secure, stable investment with a predictable income stream, as well as the prospects for capital growth.

PUTs are considered to have one of the lowest risk profiles of all the property investment vehicles.

The benefits of PUTs include:

You can invest in prime, well-located property by buying low-denomination units;
PUTs can be traded on the JSE, making them simpler to buy and sell than physical property;
You don't need to be a property expert to invest in PUTs, because the portfolios are managed by professional companies;
Unitholders' interests are protected by strict regulatory controls;
Borrowing by a PUT is limited to 30 percent of the fund's assets, so there is little risk that income will be eroded by high interest payments;
PUTs offer investors diversification of property risk because they invest across a number of buildings, tenants, lease expiry profiles and property sectors;
You can buy exposure to specific property sectors or geographic areas by investing in one of the more focused PUTs; and
You can use PUTs as security if you want to raise a loan.

Investment amounts
You buy PUTs by investing lump sums, as you would purchase shares in a listed company. You buy the units from a stockbroker.

If you want to invest an amount each month, you have to invest through a property fund of funds, which is unit trust fund that invests in listed property such as PUTs and PLS companies.

Definition
A yield is the income that you get from investing in listed property, expressed as a percentage. The yield is only one component of the return that is provided by a listed property investment. The other is capital growth in the value of the units. Mathematically, the yield is the distribution or income paid out divided by the price you paid for the units expressed as a percentage. So, if you get a distribution of 20 cents from your property investment and you paid R2 for the unit, the yield will be 10 percent (20c divided by 200c x 100). Distributions are generally made twice a year, although some PUTs pay distributions quarterly.

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Last modified on Sunday, 25 May 2014 21:54

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