What are the chances that PUTs will invest in residential property?

Posted On Monday, 26 March 2007 02:00 Published by eProp Commercial Property News
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At present, the six Property Unit Trusts (PUTs) listed on the JSE Securities Exchange are invested in various combinations of commercial, industrial and retail property but, as yet, they have no exposure to residential property.

James TempletonJames Templeton, CEO of Emira Property Fund points out that this could be an area into which the PUTs expand at some stage. “It has happened in many overseas markets,” he explains, “and the asset class is potentially very large so there are good reasons for a similar move to take place in SA.”

For example, in the UK (admittedly a far larger market than SA with 28 balanced PUTs) there are specialist residential funds which aim to provide good long term income, others which target short term capital growth and those which focus on new developments. Each has its own risk profile and investment characteristics.

A move into residential property by some of the South African PUTs would provide greater differentiation among them. Their investment ratings would also differ, providing investors with greater choice and more options to match their investments to their personal risk profile.

But is there any investment merit in investing in the SA residential property market?

John Loos, property strategist at FNB Commercial Banking, is positive on the outlook for the SA residential property market. “I believe residential property remains a good investment prospect,” he says, “even though commercial property may perform better in the near term.”

Loos expects returns on residential property to show good growth for the rest of the decade. He anticipates overall growth in house prices from end-2005 to end-2010 of in excess of 85%. With house prices having risen by 18% since the end of 2005, there is still substantial further capital growth likely. As far as income is concerned, Loos states that there are indications that rental market is recovering.

“Some pessimists may think that the good times are over, but I believe that they underestimate the pace at which the middle class grows when there is 4-5% economic growth compared to the far lower rates of the 80s and 90s,” notes Loos.

At the same time, the building sector has enormous constraints on it. All property markets – commercial, industrial and retail – are experiencing a construction boom and all compete with the residential market for materials and skills. In addition, major infrastructure projects are getting under way along with 2010 preparations, also sucking in materials and skills in large quantities.

This constrains building capacity in the residential market and drives up building costs, which must filter into house prices over time. “It will therefore not be easy to create an oversupply of residential stock,” explains Loos, “and this is a great recipe for good returns on residential property.”

However, Loos cautions that the rate of return going forwards is not likely to compete with the boom seen in the 2000 to 2004 period, but that healthy real growth can be expected.

 

Last modified on Friday, 25 April 2014 17:58

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