LISTED
Real Estate Stocks
Alternatives to traditional home ownership
BY ROB HART
F or most families, the largest asset they own is the residence they occupy. They buy a property in the desired location, and pay off the mortgage of many years, which in large proportion of cases leads to a nest egg to use for retirement. This has several advantages, including forced saving( through paying the mortgage), property typically appreciates through the longterm and provides an inflation hedge, and there are often tax advantages.
An attractive alternative to physical residential property is listed property equities. These are the stocks of property companies, usually real estate investment trusts( REITs), which own various types of property( including office, retail and residential) in different locations globally and paying out the majority of their rental income as dividends.
There are various advantages to this structure over traditional home ownership:
Higher liquidity – stocks trade in the open market daily and so a position can usually be liquidated relatively quickly, as opposed to the physical property market where one can wait months or even years to dispose of an asset. If you need money quickly for some foreseen event, then trying to sell your house in a hurry can result in a low selling price.
Lower transaction costs – buying or selling a house will typically involve agent fees of 5-7 % along with property transfer duties of up to 10 %, whereas trading at stock will cost a fraction of 1 %. Outsourcing the rental and upkeep of a property usually costs at least 10 % of the rental income per annum, whereas a fund will usually charge you around 1 % of the portfolio value per annum to run your portfolio.
Increased diversification – when buying a single property, you are“ all in” a specific location and sector, which can be very profitable, but also involves substantial risks. Owning a portfolio of listed equities allows you to spread your risk across different locations and sectors and mitigate the possible downside, allowing you to sleep better at night.
Provides a currency hedge – you can buy a stock listed in most larger countries around the world, so if most of your assets are exposed to a volatile currency, such as that of an emerging market, then you can buy assets with a stable currency through listed real estate stocks to combat your net worth getting hit by your local currency weakening.
To illustrate the efficacy of investing in listed real estate, please see the chart below. Over the last 7 years the index has returned about 10 % per annum in USD, including an annual dividend of 3.5-4.5 %. This is significantly superior to the return of the South African residential property market at around 2 %.
As a result of these advantages, institutional and retail investors are increasingly opting to put a portion of their assets into listed real estate. At Fairtree Capital we run a global developed market real estate fund, which combines the advantages above with our top-down led investment process and experienced team, a concentrated portfolio of best ideas, a comprehensive team of operational and support staff and efficient trading with low costs.
Global Real Estate vs South African Residential Property Prices *
* ABSA capital value data assuming an initial income yield of 5 % growing 5.5 % annually
Rob Hart is the Global Real Estate Portfolio Manager at Fairtree Capital
60 SEPTEMBER 2017 SA Real Estate Investor Magazine