| MARKET MONITOR 1 JULY 2005 | |||||||||
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This month I look at property investments, both listed and unlisted commercial property. I noted in last month's report that over the last 5 years, property has been the top investment class, and when compared on a risk adjusted basis has performed superbly for at least the last 10 years. The key question now is, what are likely returns going forward into the medium term? Investors must always look back at history, but be careful of merely extrapolating the recent past into the immediate future.
Executive summary
Property as an investment is different to an investment in a business (share of a business) in that around 2/3 to 75% of its total return is in the form of a yield (i.e. rental stream), with the smaller component of total return derived in the form of capital appreciation - (the last few years have thrown this on its head, with the bulk of the return being the capital appreciation, but this will stabilise over time). As a real asset however, like a business, it has some ability to continue pricing up in order to counter the effect of inflation, and so provides a real rate of return to an investor.
With a higher, more stable component to the total return for a property investment (in the form of a monthly rental), banks are far more willing to provide finance. The concept of gearing, or using third party finance to help buy a property, is therefore also far more palatable for property investors, given the steadier rental income stream used to service the bond repayments.
It's important then to remember that the greatest contributor to the total return on property over the last few years, has not come through a massive upward swing in rental incomes, but in the re-rating of the capital value of the bricks and mortar.
A private investor accesses commercial property, directly, via listed property unit trusts and loan stock companies, or via a property syndication.
There is absolutely no doubt that property syndications have their place and indeed have been used very successfully for many years. As an investment advisor, I take a very close look at all vehicles for investors and as with most investments, come across more rubbish being touted, than genuine investment opportunities.
In the report I note some of the aspects that I look at when assessing a property syndication.
One of the more important points that separates true property syndications from mere "pump and dump" schemes, is that a property investor will retain a decent stake in the property, he is not interested in marking up and on selling to unsuspecting clients. Unlike an aggressive promoter, a property investor is interested in only looking for value, and in fact where value becomes scarce, he will desist from investing (because he's putting his own capital at risk).
As an example of the effect that overpaying has on annual returns:
A property that was acquired for R25m on a 11% yield is marked up to yield an effective 9,2% and sold to investors. The rental stream escalated at 8% per annum. Assuming that interest rates remain flat for the next 5 years and the property is sold at an 11% exit yield, then:
An annual compounded 5% over a period of 5 years is a BIG difference. The investor who received the 12,6% is invested in the same property with the same risks, but is not being adequately compensated, merely because he overpaid.
Property has a definite place in all portfolios, but be very careful as to the price that you buy in at. Especially now, when we have seen the best of the interest rate declines.
For the detailed Market Focus newsletter, please click here.
If you are looking for a trusted advisor, who can help steer a path through investments, please don't hesitate to contact me for a confidential discussion. E-mail me your contact details to ian@exsequor.co.za and I will mail you a copy of my Value Proposition.
Sincerely
Ian de Lange
082 921 0220
Posted: 2005/07/04 09:27 View Archive | |||||||||