Understanding Asset Classes, Part 3: What is listed property, and what can it do for me?
In the third part of our series looking at the main asset classes, we examine listed property. Asset classes are groupings of similar types of investments, which are accessible to the investing public. So, what is listed property, how does it produce returns and how can it benefit you as an investor?
What is listed property?
Property companies, like those that develop and manage properties (or real estate) of various types, and are listed on a stock market, generally comprise the asset class known as “listed property”. Two of the biggest in South Africa are Growthpoint Properties and Redefine Properties. This asset class gives investors exposure to various types of property including industrial, office, commercial and residential space. There are over 40 property unit trusts, loan stocks and REITs (real estate investment trusts) listed on the Johannesburg Stock Exchange. They offer the benefits of real estate ownership without the problems of being a landlord, and unlike physical real estate, these shares can be quickly and easily traded.
How does listed property earn returns?
Because it is an equity, a share in a listed property company produces returns through the rise or fall in its share price over time, resulting in capital gains or losses. Additionally, it offers an income in the form of regular shareholder distributions of the rental income the companies earn (often linked to inflation).
How does it differ from other equities?
Because listed property distributions are generally based on rental incomes that rise over time, the distributions are usually more reliable over time than other listed companies. This difference generally makes listed property stocks less risky than other equities, since their distributions are likely to be steadier. This gives listed property the characteristics of both equities and bonds, making it a good diversifier. This is the primary reason why listed property is considered a separate asset class to other equities.
What type of investor would it suit?
Because you're investing in a portion of a portfolio of properties rather than a single building, you face less financial risk. Individuals with a medium- to high-risk tolerance requiring medium- to long-term capital and income growth would benefit from listed property investments. The recommended investment horizon is five years or longer.
What protections are in place with listed property?
A Real Estate Investment Trust (REIT) is a type of listed property company that is governed by strict regulations in terms of its structure and operations. South Africa’s REIT regulations are very similar to those in other countries, helping underpin investor confidence. For example, REITs are required to pay out at least 75% of their distributable profits to shareholders.
Before SA REIT legislation was implemented, there were two forms of listed property entities in South Africa: property loan stocks companies (PLSs) and property unit trusts (PUTs). Most have adopted the REIT regulatory framework set out by the Johannesburg Stock Exchange (JSE).
Prudential offers investors efficient and cost-effective exposure to South Africa’s listed property sector through the Prudential Enhanced SA Property Tracker Fund. The fund has a very strong 10-year track record, ranking second of 14 funds in its ASISA category. Morningstar also ranked the fund in the top 25% or better versus its peers over annual periods from one to 10 years ending 31 August 2016 (apart from three periods, where it still outperformed the peer group average).
In the next part of this series we will be looking at cash, or money market investments, how they produce returns and how they can benefit you as an investor.
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