More than just a diversifier; the appeal is in the attractive yield.
By Jason Swartz, Head of Portfolio Solutions at Satrix
Listed property has often suffered from an existential identity crisis. Is it an asset class all on its own, or is it a distinctive sub-sector within equity? Or could it even be seen as a high duration bond? Most seasoned investment professionals consider listed property as a stand-alone asset class given its unique character where the return drivers are linked to both equities AND bonds. As an example, a share in a listed property company produces returns through the change in its share price which is linked to earnings/rental growth prospects (equity return driver), but also offers a regular income in the form of dividends (derived from rental incomes), which is linked to inflation (the driver of bond returns). This combination of both capital gains and income provide a distinguishing character that can be accessed by investors.
As such, listed property has become an increasingly popular and accessible asset class globally over the last fifteen years, in large part due to the proliferation and success of real estate investment trusts (REITs). These products gives investors access to the same cash flow characteristics that previously were only available to direct property investors. While the REIT model is largely a global investment structure, property loan stock companies and property unit trusts listed on the JSE have been steadily converting into REIT structures over the prior five years, providing investors with effective exposure to this asset class. REITs offer the benefits of real estate ownership without the challenges of being a landlord, and unlike direct property ownership, these shares can be quickly and easily traded.
The role of listed property
A critical question around investing in listed property however is: what role does this asset class play within your portfolio?
Traditional asset classes such as equities, bonds and cash each have a clear case for inclusion within a balanced portfolio, typically revolving around improving the risk-adjusted return characteristics of a strategic asset allocation. This is no different with listed property. Since January 2004, this asset class presented the best risk-adjusted outcomes (as measured by the Sharpe Ratio) across a broad range of asset classes for South African investors. This long-term result is in spite of the correction seen earlier this year in listed property, as the asset class fell some 23.5% year-to-date. On the upside, however, this sell-off presents an attractive opportunity for investors looking to gain exposure to this asset class.
Risk and return summary of asset classes (Jan 2004 to Oct 2018)