LISTED
The Benefits of REITs
Why Investing in Listed Property is the way to go
BY IAN ANDERSON
S
ince the South African Reserve Bank raised
interest rates by 0.5%, the listed property
sector, already under the spotlight for falling
shares, staged a strong and unexpected recovery,
returning more than 12%. The recovery can be
attributed to strong distribution from companies that
have reported recently, a stronger rand and lower,
global bonds
While listed property prices have been volatile
recently, there are still a number of compelling
reasons for investors to include exposure to listed
property in a balanced portfolio.
First and foremost, listed property provides
investors with a high level of income. Although the
forward yield of the sector has declined to the current
level of 7.3%, it remains significantly higher than the
yield on cash and most money market instruments.
It is lower than the yield on the longer dated bonds,
but that yield differential reflects the second benefit
of investing in listed property.
The income from listed property grows at or above
inflation over time. As of now, income growth from
the sector as a whole has accelerated to more than
9%. This growth rate, while probably not sustainable
in the long term, is reflection of the significant
changes made in the sector over the past 10 years,
which culminated in the introduction of Real Estate
Investment Trust (REITs).
42
Commercial Handbook 2016
SA REITs grow their income through contractual
rental escalations from existing leases (usually
between 7% and 9% per annum), signing new leases
on vacant space, re-letting space when leases expire
and increasing revenue through developments
and redevelopments. By introducing gearing (i.e.
borrowing to fund property purchases), income
growth can be enhanced through prudent interest
rate management. Typically SA REITs maintain
debt to asset rations of between 20% and 40% and
hedge out more than 70% of the interest rate risk for
periods of between three and five years. They can also
grow income by managing costs. The third reason
for investing in listed property is that the growing
income stream leads to growing capital values. Listed
property is therefore the only asset class in South
Africa at the moment and capable of producing an
income yield in excess of inflation, as well as capital
growth in excess of inflation over the long term.
This is one of the reasons listed property has
been the top performing asset class in South Africa
over the last 10 years. Investors have consistently
underestimated the rate of distribution growth and
have therefore underestimated the rate at which
prices can appreciate.
Based on the current forward yield of 7.3% and
long term income growth of between 7% and 9% per
annum (which should result in a long term capital
www.reimag.co.za