Issue: June 2012 / August 2012
Property in a well-balanced strategy
The new Regulation 28 allows greater weighting for property in pension fundsí portfolios. FedGroup Financial Services executive Scott Field discusses different ways to invest.
From an asset-management perspective, an encouraging change in Reg 28 is the differentiation of Immovable Property from Participation Mortgage Bonds. They were previously classified in the same asset class. Satisfying a key investment principle of asset diversification, the differentiation between the two asset classes now permits a pension fund to invest up to 15% of its assets into Part Bonds and an additional 15% in Immovable Property.
Property is one of the largest and most widely held asset classes. Satisfying moderate risk appetite, it’s a secure and balanced investment. Pension funds considering property as part of a well-balanced strategy are presented with various options:
In “boom” times, property syndications rewarded investors with high returns. However, the failure of many high-profile syndications confirmed that the expected return does not always compensate for the risk. Syndication failures occurred primarily because investors were invested in unsecured debentures, with only a small amount of that investment secured by property.
Another approach is buying direct physical property. Under the new Reg 28, a fund may now invest up to 15% of is assets in Immovable Property but no more than 5% in any single property. This is to ensure diversification.
But there are practical difficulties in this requirement, especially for smaller and medium-sized pension funds. These funds typically invest in industrial and commercial property within the R10m-R20m price range. Assume that a fund invests in a R10m property, this would represent only 5% of its asset allocation. This suggests that the fund would need to be worth R200m even to consider including a single property as part of its investment strategy.
Another concern with purchasing direct property is the active ownership role required, especially because pension funds’ boards don’t usually comprise of Property Managing Agents. Does a board hold the expertise necessary to choose a suitable property for purchase at a suitable price? And, once purchased, who will take care of the property’s maintenance and management?
Then there’s a Property Portfolio through which direct investment in property, without the pension fund needing to manage it, is possible. The two options for pension funds are JSE-listed property funds and unlisted portfolios.
A listed Property Fund is vulnerable to share-market volatility. As a result, it cannot offer the stability of direct property fundamentals (see graph).
An unlisted Property Portfolio, on the other hand, offers diversification from the equities market. Its performance is not linked to market sentiment. The capital stability and consistency of rental income supports the value in an unlisted Property Portfolio.
An unlisted Property Portfolio offers significant returns based on property fundamentals i.e. rental income and capital appreciation. As inflation escalates, so do the properties’ rentals and overall value. Investors’ returns keep pace with inflation.
FedGroup’s unlisted Property Portfolio: diversification meets balance
In addition to reaping the benefits of the security provided by owning property, pension funds can invest in FedGroup’s unlisted Property Portfolio as an asset class without directly having to own or manage the properties. Rooted in the investment principles of diversification and balance, the FedGroup Property Portfolio offers investors direct exposure to prime commercial and industrial properties.