Shaun Harris
Until recently, property unit trusts (PUTs) hadn’t really caught the eye of the smaller, private investor.
There are a number of reasons for this. Investors tend to focus on capital appreciation, and with PUTs the income yield is as important. Also, PUTs are a relatively small sector, easily overlooked.
Perceptions began to change with the crash. PUTs turned out to be more stable performers in times of extreme market volatility. Following the crash, equities saw an average decline of 30% during August 1998, compared with the PUT index, which lost 11%.
The favourable trend for PUTs has continued ever since. Sensitive to interest rates because of the effect on property prices, PUTs were under pressure when the prime rate spiked at 25,5% last September. But the declining trend in interest rates since then has seen a positive re-rating.
Speaking at an Investment Analysts’ Society meeting early in October, Gerald Nelson, deputy chair of the Association of Property Unit Trust Management Companies, noted that while the Johannesburg Stock Exchange (JSE) all share index had gained 52% since last September, PUTs had offered a total return (capital appreciation and income yield) of 62%.
It’s not only more benign interest rates that have boosted the performance of the PUT sector. There are technical reasons, mainly the consolidation of individual funds, which through mergers over the past year has created 10 larger, more liquid, tradeable funds from the original 16.
In hand with this is the shift towards the international practice of securitisation of institutional property portfolios, the process of transferring directly-held property into more tradeable securities listed on a stock exchange. Tony Ardington, chair of the Marriott Property Fund, says this will allow investors flexibility in adapting their exposure to property.
He points to the international experience. “The growth of Real Estate Investment Trusts (Reits) in the US and listed Property Trusts in Australia is a trend from which much can be learnt. In the US there are currently in excess of 200 Reits, with a market capitalisation that has grown from $6- billion in 1990 to more than $140-billion in 1999. In Australia, property trusts have increased from Aus$5-billion to $28-billion over the same period. These investment vehicles … tend to trade at premiums to their underlying net asset values.”
Proposed changes to the Collective Investment Schemes Bill should underpin the performance of PUTs. This will allow PUTs to gear up and invest in fixed property overseas and listed offshore property investments. Changes to the legislation may allow PUTs to be geared up to 30%.
Nelson argues this will enhance the sector’s appeal and liquidity, and could trigger a shift from direct to indirect property investment. The ability to invest in property offshore will increase diversification of the funds and lend them a rand hedge element.
PUTs are a sub-sector of the JSE’s Real Estate sector. Currently, there is only one entry point for unit trust investors interested in PUTs – the Marriott Property Equity Fund, listed in the Domestic Hybrid Income sector.
Launched just more than three years ago, this fund has a sound track record – returns of 44% over three years and 58% over the past year.
Direct property investments have had a dismal record during the 1990s, but that points to another area of confusion. People tend to equate property as an investment with the house they live in – and prices here have been depressed for a long time. PUTs, how- ever, focus on high quality commercial and industrial properties with reputable tenants who provide an escalating stream of rental income.
Simon Pearse, MD of Marriott Unit Trusts, says apart from enjoying declining interest rates, the real benefit of the fund is its high income yield – about 15% at present.
“For the long-term investor, capital appreciation is not that material – it will go up and down. What’s important with the property funds is that they provide a growing source of income, based on the rental income derived from good tenants.”
This will escalate at least in line with growth in inflation, Pearse says, providing a secure, certain return on investment.