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Property for your portfolio

Property is an important asset class and should be included in any diverse portfolio. It’s important to note that I am referring to listed property; your house does not qualify. I always want listed property as it diversifies itself across multiple locations. If I were to purchase individual properties, at best I would have a handful of properties that would be tedious to manage and would likely carry location risk.

The benefit of having property in a portfolio was clearly illustrated at a presentation I attended in September. Keillen Ndlovu, Stanlib head of listed property funds, was talking about property; what really struck me was a chart that clearly indicated how property improves returns in a diverse portfolio. Having a high 15% weighting in property within a portfolio adds a few percentage points to the overall longterm return of the portfolio, but also reduces overall volatility.

So the question is how to decide on what listed property stocks to include. The first point is, as always: You want the awesome property stocks – those trailblazers with great returns and yield.

This yield is an important point with property and one of the key benefits of the asset class. Typically, property pays out a high rate of dividend offering yields that are most often well ahead of normal stocks. This yield not only provides return, but also cash flow; cash flow that can either be used for living expenses or reinvested back into the portfolio.

The other issue with property is what types of properties are generally in a portfolio. In South Africa these are typically office, industrial and retail.

The demands within these sectors will vary not only with broader economic conditions, but also location and quality.

For example: Hyprop has mostly highquality shopping centres, whereas Capco focuses on Central London, and Growthpoint seems to be everywhere, from the V&A Waterfront in Cape Town to Australia.

We have one local property stock dedicated to residential property, Indluplace. It’s new to the market, but residential property provides nice diversification from traditional property stocks. We expect to see a storage company listing on the JSE later this year, adding another type of property investment.

Valuing a property stock is different from a normal company. We need to look at the vacancy levels (lower is better), location (always important), net asset value (NAV) and debt levels. NAV is important; with property we’re buying a solid asset. But what premium are we paying for that asset? In truth I focus more on yield than NAV.

Bond yields are an important consideration when investing in listed property. There is a strong correlation between reducing bond yields and increasing property stock prices. This ratio currently suggests South African listed properties are expensive after their massive run of the last decade or so.

Finally, an important point to consider with property is that it’s fairly resilient, as rental increases are written into the lease, so income is fairly smooth.

Having said all of the above, I still revert to my preferred exchange-traded funds (ETFs). We have three property ETFs on the JSE. The first two, PTXSPY and STPROP (from Core Shares and Stanlib respectively) track the local property index, hence I turn to the equal-weighted PTXTEN*. This ETF is also issued by Core Shares and has the 10 largest property stocks in SA, equal weighted at 10% of the ETF.

This ETF includes the local biggies as well as NEPI, which owns properties in Eastern Europe and Rockcastle – the properties all over the world add a good level of geographic diversification.

* The writer owns shares in PTXTEN

This article originally appeared in the 1 October 2015 edition of Finweek. Buy and download the magazine here.

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