The listed property market

While conditions are improving in the listed property sector, the remarkable historical annual returns achieved are probably a thing of the past.

The real estate investment trust (REIT) companies used to be the darling of the JSE, especially between 2010 and 2016, when listed property companies regularly delivered annual returns of around 30% to 40%. In 2018, debt levels of listed property firms started to rise significantly, and many companies revised their earnings outlook downward. This was followed by the pandemic, which caused substantial vacancies and rental income from offices and large malls spiralled downwards.

2021 became the year of revitalisation for the sector as the SA Listed Property Index delivered a 28% return. Most listed property companies have started declaring distributable income dividends once again as tenants’ revenues have bounced back from record lows in 2020 and landlords are experiencing growing demand for their space.

Listed property investments are a means for private investors to gain exposure to a broad range of property investments that they wouldn’t normally have access to in their individual capacity. Professional property developers typically buy, develop and sell properties in a quest to grow their wealth, but few private investors can afford to buy a whole warehouse or office block.

The property companies listed on the Johannesburg Stock Exchange (JSE) own and manage a broad range of properties and provide the vehicle for individual investors to garner returns linked to the underlying properties. Those underlying properties may be anything from hotels, office blocks and shopping centres to warehouses and hospitals. There are over 40 property unit trusts, loan stocks and real estate investment trusts listed on the JSE that offer the benefits of real estate ownership without the problems of being a landlord. Some of them provide the additional attraction of being invested in offshore properties – almost a third of the foreign property companies listed on the JSE are only raising capital in South Africa and do not own or operate any SA based properties.

The key attraction of listed property is diversification in the property sector; there are many risks attached to buying a single plot of land or a buy-to-let property, but an investment in listed property can reduce that risk. Property companies generate revenue from the rentals charged to the tenants of those properties and, after deducting operating and maintenance expenses, the profits of the company are distributed to shareholders.

By accumulating several listed property companies in an investment portfolio, an investor gains substantial exposure to a wide array of properties across diverse geographies, sectors and currencies, and these provide a growing income stream over time. Shares in property companies, like with all equity instruments, should be considered long-term investments. With low growth prospects for the SA economy and the weak rand, some investors may want to consider investing in listed property offshore. Offshore listed-property investments offer diversification of geographies, hedging against the rand and lower funding costs.

There is a strong (inverse) correlation between interest rates and listed property company share prices. Listed properties held through the cycles, however, provide growing income that inevitably supports growth in capital values. The key is to ensure that you are investing in the highest quality property companies with strong management teams, and not to overpay for these assets. Listed property investments are usually considered chiefly as income-generating assets, alongside cash, bonds and preference shares. As such, they should be considered in all balanced investment portfolios. It is always preferable to get independent advice around your own investment portfolio, as the make-up of that portfolio will be specific to your own investment requirements and constraints.

The information contained in this article is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/adviser to take into account your particular investment objectives, financial situation and individual needs.