STRATEGIES
Property Investment
Using Listed Property Funds
for Pension Fund Investment
BY MIKE BROWN
T
he 22 percent per annum total returns
obtained by the FTSE/JSE Listed Property
Share index (SAPY) over the past 10 years,
makes this sector of the investment market an
attractive proposition for long-term investors.
Pension funds, including retirement annuity funds,
preservation funds, provident funds and other benefit
funds, of course, fall into this category of long-term
investors. For such funds, listed property shares offer
two key advantages:
•
The income, or distribution yield, paid by listed
property shares is typically linked to the yield
on long-term fixed income Government bonds.
However, property shares pay a premium to
the Government bond yields, because of their
perceived higher risk. This makes then a good
alternative, or supplement, to fixed income
bonds, for investors seeking consistent income
returns (which of course applies to retirement
funds).
• Listed property shares also offer consistent
capital growth, as the rental income from
tenants (typically linked to the inflation rate)
rises, buildings are revalued and new assets
are acquired. Accordingly, the net asset value
(NAV) of the listed property company rises
consistently and so does the share price which
tends to be NAV driven.
This combination of steady income growth, as
well as capital growth, imparts a unique character to
listed property as an asset class. In recent years, the
volatility, or significant fluctuations in share prices,
www.reimag.co.za
which used to characterise property shares, has
largely disappeared. In fact, measured by standard
deviation methods, listed property is fast becoming
one of the least volatile asset classes. This increases
its appeal for pension fund investors, for whom
relative volatility is important.
The Regulation 28 requirements, which prescribe
the maximum for various types of assets that may
be held by retirement funds, have always limited the
exposure to property by such funds to 25% of total
assets. The review of the Regulation 28 requirements
in 2011 confirmed these limits. Investment in
immovable property, i.e. not listed on an exchange,
is limited to 15% of assets of the retirement fund
(and 5% to any single issuer or entity. Whereas if
the property investment is listed on an exchange, the
limit rises to 25%. This also applies to a Collective
Investment Scheme, listed on an exchange.
For individual listed property shares, the
retirement fund is limited to a maximum of 15%
that can be invested in a single issuer, if the market
capitalisation of the issuer is over R10 billion, down
to only 5% if the market capitalisation of the issuer
is below R3 billion. However, because a Collective
Investment Share applies the “look through”
principle, a retirement fund can allocate its entire
25% of assets to a listed Collective Investment
Scheme, i.e. a listed ETF, such as PropTrax ETFs.
The relatively small size of the listed property
sector has been a deterrent to investment by large
pension funds up until now, but with this sector now
accounting for a market capitalisation of over R450
billion, this is becoming less of an issue.
Commercial Handbook 2016
37