Real Estate Investor Magazine South Africa April 2014

STRATEGIES growth rate. Once again we pose the question, whereto from here for property spreads? Dividend distributions The single best aspect of listed property is that over time, dividend distributions grow roughly in line with inflation. Chart 2 shows that sometimes the growth is faster and sometimes it’s slower, but fact of the matter is that there is a correlation. This is because shopping mall or off ice rentals typically escalate in line with inf lation and, depending on cost control and funding costs (interest rates), this increase is passed through to investors. This differentiates listed property from a normal government bond where the income (coupon) is fixed. In theory, property can be described as a ‘real’ asset and is more comparable to inf lation-linked government bonds. These bonds currently yield around 2%, making listed property yields of more than 6% very attractive. A 6% real return is however only realisable if dividend distributions keep track with inflation going forward. “The single best aspect of listed property is that over time, dividend distributions grow roughly in line with inflation.” Of the three supporting factors we touched on above, we see only one persisting: distributions growing roughly in line with inflation. Interest rates globally are still close to historical lows and are likely to rise in future. If sentiment towards listed property changes in this environment and spreads rise, prices will fall sharply. 50 April 2014 SA Real Estate Investor SUBSCRIBE It is not diff icult to paint a scenario where bond yields rise by 1% and spreads close by 1% (for those that follow the f inancial press, think tapering by the US Fed faster than currently expected). This 2% change in the yield will instantly knock around 25% off the price of property. The opposite scenario, where yields fall a further 2% from current levels, is however difficult to imagine at this point in time. In Table 1 we share a summary of our investment views. The remaining tailwind for listed property, distribution growth, is however extremely powerful. If distributions grow roughly in line with inflation and you have a long (say ten-year) investment horizon, attractive real returns is achievable even in a rising interest rate environment. It is all about your investment horizon Our investment conclusion is clear: Investors with a short-term investment horizon that cannot handle volatility should refrain from investing in listed property. The volatility of listed property is almost on par with that of the F TSE/ JSE A LSI. We don’t advise anyone who does not have a long-term investment horizon and cannot sit through sharp price falls to invest in shares. We bel ieve l isted proper t y is a n impor ta nt component of a long-term growth portfolio. Even though listed property has different characteristics to shares, you need a similar investment approach. Currently, we do not hold property in any of our portfolios and prefer to be overweight shares. If our short-term investment view plays out and yields rise to attractive levels, we will definitely be actively looking for an entry point into this market. RESOURCES Citadel Wealth Management www.reimag.co.za

Real Estate Investor Magazine South Africa April 2014 | Page 52