Chairperson for the Association of Property Unit Trusts, James Templeton, says despite the decrease in prices, and threats of further interest rate hikes, the fundamental investment merits of PUTs remain firmly intact: building costs are forecast to rise at 15% per annum for the next two years, land prices are rising and vacancies are falling rapidly. Investors should therefore capitalise on the low prices to buy into the sector for the long-term.

First South’s Leon Allison follows the sector closely and says the recent period has seen the most volatility and weakness in years. “Fearing further interest rate hikes in the US, global investors moved away from emerging markets, and local factors weighed heavily as well,” he says.

“The 50 basis point (bps) rise in interest rates coincided with the largest current account deficit in 24 years, leading to a sharply weakening Rand. The ten-year long bond yield increased around 130 bps to 8.7% and inevitably listed property yields followed, increasing 200 bps with prices declining by 20% on average.

“But behind this, underlying property fundamentals remain solid. On a 12 to 18 month view, we’ve actually raised our income growth forecast up to 10,7%, and forward yields are again attractive,” says Allison.

Intuitively, investors fear higher interest rates will impact on property investment as debt payments are increased, but having very little gearing, Property Unit Trusts (PUTs) will not be affected by higher debt costs.

Templeton says that PUTs are structured to protect investors against highly-geared and speculative property investment.  “PUTs offer a pure proxy for direct, un-bonded, property investment,” he says, “but with the advantage of being able to selectively target properties with high growth potential.

“As an investment option, PUTs can claim both security, being underpinned by quality physical assets, and growth, as growing income streams are distributed directly to unit holders,” says Templeton.

As with physical property, listed property investment is best seen with a long term view. Despite occasional volatility in the sector, as prices react to changes in interest rates, the fundamental benefits of listed property remain intact.

Allison believes there is particular value in the sector at present. “Long-term investors should not be selling listed property now, but rather be buying selectively. Investors with a short-term horizon should rather be avoiding financial markets and invest in low risk, but low yielding, cash,” he says.