Cape Town - The clichéd mantra "location, location, location" couldn’t be more apt when exploring the investment potential in the global real estate market, according to Mike van der Westhuizen, investment analyst at Citadel.
"When making a case for diversifying into offshore property the starting point is our belief that global listed property is currently offering great potential," said Van der Westhuizen.
"Sentiment towards listed property in general has taken on a pessimistic tone, in part because the economic crisis of 2008-2009 started as a housing market crisis in the United States. But this is changing and investors are increasingly looking to gain exposure to this asset class."
In his view the most liquid, cost-effective and hassle-free way to achieve this is through listed property stocks - in other words property-focused shares that trade on stock exchanges.
Structures called real estate investment trusts (or Reits) are a common and globally recognised way for investors to access income-producing, listed property.
A Reit is essentially a company that owns and manages a portfolio of real estate assets. To qualify as a Reit a company must have most of its assets and income tied to real estate investment and must distribute at least 90% of its taxable income to its shareholders annually.
"This income focus means that Reits generally produce a higher dividend income than 'regular' stocks. Also, given that the underlying revenue (rental income) is mostly contractual (and, in most cases, closely tied to inflation), listed property income streams are more predictable than most equities and can provide good inflation-hedging over time," said Van der Westhuizen.
"Diversification is, as always, key to investing and geographical and sector diversification within this asset class is important. When we consider that South Africa makes up about 1.3% of the global $1.3trn listed property universe (as measured by the FTSE Epra/Nareit Global Index), it also makes a case for looking to different regions."
South Africa’s listed property market is dominated by large, diversified companies such as Growthpoint and Redefine, which operate across the retail, office and industrial sectors.
Globally, however, the picture is quite different and specialisation is common. For example, certain New York Reits specialise in retail and office buildings located only within a few blocks of Central Park in Manhattan.
"As investors we should take cognisance of the fact that the likes of Growthpoint and Redefine are finding it increasingly difficult to find good opportunities in South Africa. While South African Reits have focussed their offshore investments into the United Kingdom, Australia and Eastern Europe, many other regions offer even better value," said Van der Westhuizen.
"Internationally, the overall picture at the moment is a positive one for property. The global economy continues to recover, while interest rates remain close to historical lows. Few new developments have gone up over the last number of years, specifically the United States and Europe, therefore, a supply shortage is developing."
Furthermore, many of the rental agreements signed during the 2008 to 2009 global economic crisis are now coming up for renewal and significant upward revisions are possible. Vacancy rates also continue to improve.
"While the environment is certainly conducive for investing in this asset class, it is important to remember that listed property investing necessitates a similar, long-term mind-set to that required by ‘regular’ equity investors," cautioned Van der Westhuizen.
"Historically, the drawdowns and volatility within this asset class have been higher than that of ‘regular’ equity, but investors willing to take on this risk have been rewarded over time. We believe investors currently seeking exposure to offshore property will reap similar rewards."