A simple comparison suggests that if recent trends continue property is a more sensible investment than either bonds or equities.
The performance of listed property assets over the past few years speaks for itself, especially when compared to the performance of the highly volatile equity markets.
Over the past three years the property index of the Johannesburg Stock Exchange has grown by 27,4%, outperforming the All Share index by 14,2% and the R150 bond by 11,5%. Property has produced the highest income (19,6% per annum) as well as the highest capital return (7,8%) of all the major asset classes. Listed property has outperformed listed equity by 14,2% a year at almost half the risk (measured by volatility). Property has also outperformed bonds by nearly 12% a year.
There are a number of fundamental reasons why property remains an attractive investment. Currently, property is cheap. On an income yield basis, listed properties are less expensive than government bonds. In addition, government bonds offer very little capital appreciation prospects.
Until mid-1997 properties traded at a premium to bonds (the higher the yield the less expensive the stock). Property also offers the benefit of diversification by asset class and geography. Some funds allow for an offshore component, thus effectively hedging a portion of the portfolio against a weakening rand.
The high-income component (about 80% of total return) not only decreases volatility and increases certainty of returns, but also makes property very attractive for low tax-paying individuals and entities (such as NGOs and educational institutions). Relative to equities, property will be far less adversely affected by the new Capital Gains Tax (due to come into effect on April1) because this high degree of return is largely dividend based.
Institutions in South Africa currently have a less than 2% exposure to listed property and are starting to see the benefits of holding property investments. It is expected that over time those holdings will be brought more in line with international norms of about 6%. This potential increase in demand bodes well for property prices.
The supply dynamics also look set to benefit property prices. Cement sales and building plans passed (the precursor to property development) are at or near historic lows. The forecast of strong economic growth in the local economy over the next few years, coupled with the secular decline in interest rates as the Reserve Bank targets inflation, will be to the benefit of real property rentals.
Historically, one of the major concerns of listed property was the relative illiquidity. This situation is improving daily, with a spate of new property listings and consolidation in the industry.
In summary, property is a high yielding (15%), low-risk (half that of equity) asset class offering superb value and diversification benefits. We expect to see the sector rerate over the next couple of years providing returns in excess of the equity market.
Ebrahim, Kotze and Johnstone are employed by Oasis Asset Management