Using Listed Property funds for Pension Fund Investments

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The 22% per annum total returns obtained by the FTSE/JSE Listed Property Share index (SAPY) over the past decade, makes this sector of the investments market an attractive proposition for long-term investors.

Pension funds, including retirement annuity funds, presentation funds, provident funds, and other benefit funds, of course, fall into this category of long-term investments. For such funds, listed property shares offer two key advantages:

The income or distribution yield, paid by listed property shares is typically linked to the yield on long-term fixed income Government bonds. However, property shares pay a premium to the Government bond yields, because of their perceived higher risk. This makes them a good alternative, or supplement, to fixed income bonds for investors seeking consistent income returns (which of course applies to retirement funds).

Listed property shares also offer consistent capital growth, as the rental income from tenants (typically linked to the inflation rate) rises, buildings are revalued and new assets are acquired. Accordingly, the Net Asset Value (NAV) of the listed property company rises consistently and so does the share price which tends to be NAV driven.

This combination of steady income growth, as well as capital growth, imparts a unique character to listed property as an asset class. In recent years, the volatility, or significant fluctuations in share prices, which used to characterise property shares, has largely disappeared, In fact, measured by standard deviation methods, listed property is fast becoming one of the least volatile asset classes. This increases its appeal for pension fund investors, for whom relative volatility is important.

The Regulation 28 requirements, which prescribe the maximum for various types of assets that may be held by retirement funds, have always limited the exposure to property by such funds to 25% of total assets. The review of the Regulation 28 requirements in property (i.e. not listed on an exchange) is limited to 15% of assets of the retirement fund (and 5% to any single issuer or entity). Whereas if the property investment is listed on an exchange, the limit rises to 25%. This also applies to a Collective Investment Scheme, listed on an exchange.

For individual type listed property shares, the retirement fund is limited to a maximum of 15% that can be invested in a single issuer, if the market capitalisation of the issuer is over R10 billion, down to only 5% if the market capitalisation of the issuer is below R3 billion. However, because a Collective Investment Share applies the “look through” principle, a retirement fund can allocate its entire 25% of assets to a listed Collective Investment Scheme, (i.e. a listed Exchange Traded Fund, such as PropTrax ETFs).

The relatively small size of the listed property sector has been a deterrent to investment by large pension funds up until now, but with this sector now accounting for a market capitalisation of over R450 billion, this is becoming less of an issue.

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