The specialist property funds had modest beginnings in 1996, when Marriot, a niche Durban-based manager, launched its property fund as a collective investment.
At the time there was confusion between it and the listed vehicles also known as property unit trusts (but now, to reduce confusion, called real estate investment trusts). Some even confused these new products with property syndications, which had been the easiest way for private investors to get exposure to the property sector, though usually to a single property such as a mid-sized shopping centre.
Property was out of favour at the time, and the sector had a limited selection of shares. Yet any early adopter of these property equity funds would have done very well.
According to the Old Mutual Long-Term Perspectives document there was a negative 7.8% real return from listed property from 1983 to 1998; but since 2002 the return was an astonishing 15.4%. Of course, this re-rating cannot go on indefinitely. But property has many of the best characteristics of equities and bonds, and is an inflation hedge, as there are built-in escalations of about 8% in almost all rental agreements.
Property funds account for 4% of the unit trust industry’s assets, or R71.9bn, which is higher than the R53.3bn invested in bond funds.
And it is interesting to compare the success of the fad sectors of the late 1990s: the technology fund sector has been disbanded, the small cap sector limps only, but property is now 10 times bigger than small cap while industrial and financial funds are smaller still.
In the early years property was a simple, rand-based yield play, and there was a concerted effort to build large local businesses through mergers and takeovers such as Growthpoint and Hyprop. Investors liked the retail focus in view of the high profile of the assets and their reliable tenant mix. Hyprop grew from Hyde Park Corner in Sandton to larger centres such as Cape Town’s Canal Walk, The Glen, south of Jo’burg, and Clearwater, northwest of Sandton.
The largest and most high profile of these is New Europe Property Investments, which has its asset base in Romania yet is still considered a ‘domestic’ share
There is a further high-quality option now that Liberty Two Degrees has been listed. Its core is the super-regionals, Sandton City and Eastgate. And there could be still further supply of local listings if, for example, Old Mutual lists part of its portfolio or one of the more secretive private investors, such as Zenprop, does so.
But the sector now has a substantial international component. For the past 20 years, a very large property business has been listed on the JSE: Liberty International, which later split into two businesses — Intu, a lot like a British version of Hyprop, and Capital & Counties, which is more of a capital play than an income producer.
These shares never formed part of the SA Property Index. But more recent international listings do. The largest and most high profile of these is New Europe Property Investments, which has its asset base in Romania yet is still considered a "domestic" share.
The other trend has been for international property businesses with no previous connection to SA to list on the JSE An example is Hammerson, Intu’s main rival in UK shopping centres. When all these funds are taken together, the offshore component of the JSE property sector is as high at 58%. It would be higher, except that the UK-based businesses have traded well below their historic highs since Brexit.
So there has been euphoria around the property sector.
What do prospective investors need to know before investing in these funds? Anton de Goede, manager of the Coronation Property Fund (which was analysed in IM last year) says there is some oversupply in office space as corporates such as Sasol and Discovery, as well as legal firms such as ENS and Webber Wentzel, relocate to new head offices in Sandton and the tenant pool does not increase.
The retail sector could also be soft, as it is estimated that 100 malls have come on stream in recent years.
Curiously, industrial property has been the most robust, even though barriers to entry are low as it is much easier to build warehouses than other properties.
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