JSE's new property indices offer exciting opportunities to investors


By Fazila Manjoo
Head of Research at STANLIB Index Investments

Since 2015, the JSE has run a project to improve its property indices. It is expected that three new indices will be launched to enhance the current offering, namely the South Africa Real Estate Investment Trust (SA REIT), All Property, and Tradable Property indices. These changes offer exciting investment opportunities that will raise the stature of listed property as an asset class.

Listed property is an essential component of multi-asset class funds

The property sector has been the best performing asset class since the inception of the SA Listed Property Index (SAPY) in 2003, having achieved remarkable growth. The market capitalisation of the SAPY is close to R500 billion today.

A key driver of growth has been the increase in geographical diversification of the SAPY. At the end of 2016, approximately 66% of the exposure of the index was SA-based, down from 99% eight years ago. This change has been the result of property companies diversifying their income streams to capture growth outside of South Africa, as well as international companies seeking secondary listings on the JSE.

Chart 1: Increased offshore diversification in the SAPY over the last 8 years

Source: Avior Capital Markets

Property provides equity-like returns but with significantly higher dividend income, which can help to minimise the impact of market volatility. For example, during the 2008 global financial crisis local listed property lost only 4.5% compared to the far greater 23.6% loss for equities.

 

Chart 2: Calendar year asset class returns in South Africa over the past 13 years


Source: Bloomberg and STANLIB. Index total returns in ZAR were calculated using the SAPY, Top 40 Index, ALBI and STEFI.

 

The primary reasons for investing in property are its diversification benefits and inflation beating returns over the medium to long term. These benefits, together with improved liquidity of the sector have led to the growth of passive index trackers and ETFs that track the performance of baskets of property stocks.

Passive multi-asset class funds have performed well over the past few years due to a combination of a higher allocation to property and lower costs. Passive funds typically have a longer-term investment horizon because performance is mainly driven by very stable strategic asset allocations over time. Active funds meanwhile are able to make more tactical asset class allocations, changing their exposures in line with their changing investment views. Diversifying investments between active and passive funds minimises concentration risks that can occur with active management while reducing total investment costs.

New property indices address the problems of representativity and investability

Although property as an asset class is attractive to asset allocators, improving the current index offerings could further boost the sector’s attractiveness. The requirements of a good index depend on whether it is used as a benchmark for performance measurement or if it is used as an investment vehicle. For example, while representativity (high number of stocks) may be important for active funds, investability (liquidity by way of stocks being easy to buy and sell) is of greater importance to passive funds. The new indices proposed by the JSE address both these challenges.

The SA REIT Index will cater for investors that want specific exposure to SA-based REITs, which can provide higher income yields than property development companies and foreign REITs. They offer investors greater liquidity and diversification at lower costs than direct ownership in a handful of properties.

The All Property Index will serve as a broad benchmark of all listed property stocks tradeable on the JSE. It will increase access to property stocks with primary listings offshore and which have diverse geographical sources of revenue. Having more constituents (number of listed stocks) reduces excessive stock concentration and provides a diverse opportunity set from which active funds can extract excess returns over the index.

The Tradable Property Index will make available a tradable index of large and mid-size property stocks with reduced liquidity risks and trading costs. This may prove to be a popular underlying investment of low-cost index trackers and ETFs.

Considering new ways of constituting the property indices marks an important milestone in the development of the listed property sector. These changes will boost both active and passive investment strategies, and ultimately the savings and investment industry in South Africa.


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