In the wake of this month's Budget, the market has stamped its approval on the notion that property as an asset class is the next big thing.
The JSE-listed property sector surged on the announcement by Finance Minister Trevor Manuel of tax relief to employees using retirement funds as a saving tool.
The drop in taxation on pension and provident funds from 18% to 9% will act as a strong incentive for South Africans to increase savings.
Cash, bonds and listed property are tax-transparent. This means that all profits are paid out to investors - taxation becomes a liability only when the cash is with the investor.
Given the recent tax cuts, retirement funds will give serious consideration to increasing their allocation in these three asset classes.
With tax on companies holding steady at 29% and secondary tax remaining unchanged at 12.5%, the return on equities will not see an automatic uplift in the aftermath of the Budget.
The drop in retirement funds tax implies that an investment in listed property can generate increased after-taxation income returns of as much as 11%. This is because of the lower taxation rate on income earned from listed property stocks.
One of the most attractive features of investing in listed real estate is that property unit trusts and property loan stocks must pay at least 90% of their taxable income to shareholders in the form of distributions each year.
The listed property industry's dividend yields are, on average, significantly higher than other equities. The sector can generally be counted on to produce a steady stream of income through all market conditions.
However, retirement funds in SA continue to allocate a lower proportion of funds to property than their counterparts elsewhere in the world.
Internationally, the allocation to real-estate investment trusts (REITs) has historically been around 5%, but there are a number of large pension funds that have made public their intention to increase their exposure.
One example is the Californian Public Employees' Retirement System, the US's largest pension fund, with assets totalling $200-billion. The fund's current asset allocation to real estate is 4.6%, but it is targeting an exposure of 8%.
In SA the retirement fund industry's exposure to listed property has been minimal in over the past 20 years.
This lack of investor interest is reflected in the size of the sector, which remains at roughly 2% of the JSE's market capitalisation.
Using data for the past 10 years, an optimally balanced portfolio should have had at least 12% allocated to listed property.
There are signs that SA's investors are moving in that direction. Listed property share prices on the JSE strengthened on the back of Manuel's announcement to reduce taxation on pension and provident funds.
However, pension and provident funds can take some weeks (if not months) to agree to a change in asset allocations and realign their portfolios. The cash would only start to flow into the sector in the next few months.
Sunday Times
Publisher: I-Net Bridge
Source: I-Net Bridge
