When physical property is not an option | Fin24

When physical property is not an option

Jul 20 2017 11:31
Schalk Louw

Schalk Louw, portfolio manager at PSG Wealth

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In many ways, our lives have become extremely complicated. No different to technology, investments have become more and more advanced. Unfortunately, they haven’t necessarily become easier to understand.

That said, the term “good opportunity” doesn’t only have to apply to complicated investment options. Simpler and even cheaper investments such as property shares definitely shouldn’t be overlooked as an investment option.  

Having delivered returns of 14% per year over the past five years, it has been South Africa’s best-performing asset class (out of local shares, bonds, property shares and cash).

I’m not saying that property shares will continue to achieve the same amount of growth over the next five years, though. In fact, as at the end of June, it has been the worst-performing asset class for 2017 so far.

The thing that has always attracted investors to this asset class, however, is the income that property shares offer, especially for those who need an additional income from their investments. 

So, what exactly are property shares and what are the advantages of investing in them? It is a portfolio consisting of a number of properties (listed and unlisted). The advantages of investing in these shares include the following:

• Easy to trade: Unlike physical properties, most of the property shares listed on the FTSE/JSE are highly tradable. As an investor, you should be able to buy and sell your shares within a day or two. You don’t need to wait for the property to be transferred or registered as you would with physical property. Your money will reflect in your bank account within days.

• Lower costs: There are no costs to pay in terms of agent commissions, registration and lawyers, as is the case with physical properties. You will need to pay broker fees, market taxes and VAT, but these costs are considerably lower than the other costs mentioned.

• Less maintenance: You don’t have to wait for your monthly rental income as you would in the case of physical property. You also don’t have to worry about any form of maintenance to the property.

• Regular feedback: For companies to be listed on the FTSE/JSE, they must adhere to a very strict set of rules and regulations. Some of these regulations stipulate that companies must make their audited financial results available to shareholders, saving you the trouble of having to audit your own property investment as would be the case in physical property.

With the rand still performing stronger relative to last year and with inflation on the decline and our economy still under severe pressure, the possibility that the Reserve Bank may lower interest rates in the near future is huge – something that will definitely affect the value of property shares.

No different to physical property, property shares too are very sensitive to interest rate movements, because this affects the amount of interest that investors earn on their capital invested in the money market.

As money-market rates become more unattractive, investors will usually start to look for a higher income and many of them will be willing to take the somewhat higher risk attached to properties.

As property shares are bought, prices tend to rise while earnings tend to fall.

Considering the sector’s an average historical dividend yield of 6.2%, investors aren’t really earning that much less than they would in money-market investments (provided property shares manage to maintain these payouts). Although property may carry more risk when compared to money-market investments, it does offer the advantage of possible capital growth over the long term.

Just remember that even though the income attached to property shares is listed in the dividend income section in newspapers, magazines and webpages, it is actually an interest income, and investors will be taxed on this income.

The forecast dividend yield relative to money-market rates and the price/net asset value indicate that Growthpoint, Redefine and Fortress B currently stand out as good buys. All indications are that the interest rate environment will definitely swing in favour of these shares in the months to come.

Schalk Louw is a portfolio manager at PSG Wealth.

This article originally appeared in the 27 July edition of finweekBuy and download the magazine here.

investment  |  portfolio  |  property  |  reit