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Listed property versus bonds

Jun 13 2012 07:53
Mzwandile Jacks

DID you think bonds and cash were a flashier form of an asset class than property? Well, think again as listed property investments have emerged as investments that offer flexibility and liquidity.

This is according to Ian Anderson, the chief investment officer at Grindrod Asset Management, who insists that listed property is far more attractive than bonds.

"Bonds offer yields of 7.8% with no prospects of income growth. (On the other hand,) cash provides negative real yields," says Anderson.

"Returns of 12 to 16% per annum can be attained from listed property over the next five years."

With listed property as an investment option, you do not need to be landlord of a physical building to enjoy the benefits of long-term, inflation-hedged capital growth and a regular attractive income.

It is also a far cry from owning physical property, which brings with it the hassles of regular maintenance and high risk of exposure to a single building with a handful of tenants. Listed property investments provide exposure to a range of properties without these headaches.

"With listed property funds' underlying assets comprising a range of some of the best properties in South Africa that are only commercial and not residential - such as shopping malls, warehouses and offices - rentals are more certain and risk is spread and reduced," he says.

"By investing in listed property, you get the two types of investment diversification.

"Firstly, you are diversifying the volatility of your portfolio as the listed property sector has a relatively low correlation with other asset classes. This makes listed property as integral as equities, bonds and cash to any diversified investment portfolio.

"Secondly, by adding an income stream from the property sector you are further diversifying the source of your investment returns from a different sector of the economy."

Tax plus for retirees

What can you expect from listed property? These investments typically offer equity type returns with lower volatility. In the past, they have offered a significant yield premium over equities, which pay dividends and have matched the income yield from local government bonds.

"But unlike bonds, listed property yields have the potential for growth through the growth in income from the underlying property investments," Anderson says.

"Returns are driven by a high initial income yield and inflation-beating income growth. The high level of current income is paid as a regular income stream through quarterly or bi-annual distributions and you benefit through the growth in that income over time (as rentals increase annually)."

He says listed property investments are ideal if you are income-dependent or retired, or have a conservative to moderate risk profile.

"Income is taxed in your hands as interest at your appropriate tax rate.

"This is likely to benefit older retired investors. If you invest in listed property through a living annuity, preservation fund or retirement annuity, you enjoy the full benefit of the high income, as no tax is deducted in these investment vehicles," Anderson says.

"You should be prepared to invest in listed property for the long term and keep your investments for at least five years," says Anderson, adding that it is always best to consult a financial planner for advice.

 - Fin24 

bonds  |  investing



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