Why property shares beat other investments: high income, capital growth

South Africa's new banknotes, which features an image of former president Nelson Mandela on the front and images of the country's "Big Five" wild animals on the reverse, are seen in a till as they go into official circulation in PretoriaIf you are looking for an investment that produces a steady income stream and allows your capital to keep growing, look no further than South African listed property shares. As Mike Brown, a leading figure in South Africa’s investment industry, explains: listed property shares have unique characteristics. They are considered to be fairly low risk, too, which is why pension funds are allowed to hold as much as 25% of their portfolios in listed property shares. – JC

By Mike Brown*

Listed property shares, which now account for a market capitalisation of R350 billion on the JSE, are a distinct asset class. The Regulation 28 Requirements of the Pension Funds Act, for instance, allow 25% of the total assets of a Pension or Retirement Fund to invest in listed property shares, over and above the allocation to other equities (shares) that are allowed under this Regulation.

listed property shares
Listed property shares should be an essential part of everyone’s portfolio, argues investment industry entrepreneur Mike Brown. He is managing director of etfSA.co.za.

The unique characteristics of commercial property securities is that they pay both a high distribution (dividend) yield, as well as providing capital growth over time.

This dual capacity as high yielding instruments as well as capital growing equities, separates property securities from other equities (which typically have substantially lower distributions) and from bonds, which pay high yields, but offer little or no capital growth.

Even preference shares, which pay a high dividend yield, typically linked to the prime rate of interest, normally trade at par, so show little or no capital growth over time.

Listed property shares as an income-bearing asset

Over the past 15 years, the average distribution yield on listed property shares on the JSE has been close to 9% per annum. This is equivalent to RSA Government bonds over the same period, or indeed, the total return for RSA Government inflation-linked bonds.

So, from a yield point of view, property shares pay equivalent returns to the so-called risk free investment class of Government bonds.

Property shares as a capital growth asset

The ability of property shares to pay high income returns is dependent on the rents they receive from the commercial properties (shopping centres, industrial parks, office buildings) they own. As rentals are linked to the Government bond yield, they escalate typically at above the rate of inflation on an annual basis.

As long as property owners have well let buildings, rentals earnings can often grow at well above the inflation rate, thus giving significant real returns. This can be reflected in an appreciation in the value of property shares, through price increases on the JSE.

In addition, the commercial property owners will renovate their buildings, make constant improvements, purchase new buildings, develop properties, purchase other property portfolios or companies, etc. all of which adds to the capital value of their portfolios. In this way, property shares are also a Net Asset Value (NAV) play.

The total return of listed property shares (using the JSE Listed Property index, SAPY) is compared with the  total return on RSA Government bonds and inflation-linked bonds over the past 3, 5 and 10 years in the table below.

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The extremely good returns for the “hybrid” investment, listed property shares, make a strong case for considering this as a separate asset class, for inclusion in medium- to long-term portfolios.

* Mike Brown is managing director of etfsa.co.za.

Also read:

SA property company Fortress shoots into world’s top five performers. Global rankings (see table)

Property funds: How closely do they track index? Lifting lid on returns (table)

Maurice Shapiro on Attacq’s results


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