Pension Fund Investors wary of listed property

Pension Funds Investors just do not trust listed property, according to experts at the IPD Property Investment Conference held last week.

Pension funds need to begin to pay attention to listed property according to experts at the IPD Property Investment Conference held last week.

It may be time that pension funds actually look at African property funds. They can also buy property directly in Africa. The development of African property infrastructure is moving very quickly. Kenya is developing its real estate investment trust (Reit) structure for example. Still across Africa, pension funds have been slow to invest in direct or listed property. 

Still across Africa, pension funds have been slow to invest in direct or listed property. AfricaPropertyNews.com has learnt that only about 3% of pension money is put into property in South Africa, the largest property market on the continent. This is while managers are allowed to put up to 25% of their investable funds into property in the country.

But South Africa's listed property has been a strong performer for more than a decade. It has outperformed equities and bonds ever since funds began to list around 2000. Various conditions have worked in its favour such as a large number of listings, low interest rates and strong performances from shopping centres.

Hubs like the V&A Waterfront in Cape Town, Sandton and Rosebank in Johannesburg have also helped office owners to soar.

Conditions are more difficult now but various property stocks are capable of outdoing other investments even if the sector overall does not. These conditions include very soft economic conditions. Property funds are looking abroad for what they see as better growth opportunities. They are literally looking all over Europe and some are considering Australia.

Pension funds which have invested more substantially include Coronation Fund Managers and Grindrod Asset Management. Nevertheless too many pension funds just do not trust listed property.

David Shapiro, a senior broker at Sasfin says that property funds have often lacked enough size for pension funds to consider them.

"We have had a couple of larger funds like Growthpoint and Redefine but these have only grown substantially over the past few years. We are more accustomed to investing in companies which have a longer history of operations," says Shapiro.

Some analysts say listed property is too reactive to what bonds do. Both are income producing assets and listed property tends to track bonds.

There are concerns that rising interest rates in SA will put pressure on the costs South African funds pay, making things more expensive and harder.

Now that listed property stocks are bigger than retail, healthcare and construction and many mining stocks, they have to be considered. This is even if only three or so property stocks are that large.

Many larger property stocks have also joined property indices including global ones which is attracting index trackers. This may bring them to the attention of pension funds. Some analysts believe pension funds will also have to look stock by stock and not just at sectors overall.

If pension funds believe listed property will not outshine equities in 2015, they may choose direct property instead. This could bode well for them, Dries du Toit, a consultant says.

"Direct property is the place to be for the next five years. It is my cinderella asset. It is not overvalued and there are many opportunities," he says.

Du Toit says a rerating in expected for listed property which would see it only manage about 9% a year for the next five years each year. He believes that direct property can manage a total 14% return.

He says it is unlikely that as many overseas institutional investors will jump into SA listed property so SA listed property will not receive the same kind of boost that it did from them over the past couple of years.

The implementation of the real estate investment trust (reit) structure helped gain international interest but this short term boost is now gone, he says.

Property funds also need to buy unlisted portfolios as fewer listed portfolios are around. This can prove to be relatively more expensive and can take longer.

Estienne de Klerk, MD of Growthpoint Properties, says the listed property sector has managed to finance acquisitions of other listed property counters and has developed properties from scratch for relatively not a lot of money since the recession in a low interest rate climate.

But now conditions are tougher according to De Klerk.

"We have to work harder and things could take longer. This is partly why many of us are going offshore and looking for opportunities in lower interest rate environments," he says.

While direct property could perhaps be a viable alternative for investors as opposed to listed property, some investors including pension funds could try to buy into African Reits.

Kenya is currently further developing its Reits system. A number of South African funds are developing or buying assets in Africa. Some of these will eventually become Reits which pensions could invest in.

Hyprop already has exposure to malls in Ghana. Delta International owns a mall in Morocco. It has found it fairly difficult to generate strong income returns so far. But the fund now has Bronwyn Corbett at the helm as CEO. She remains at Delta Property Fund from which Delta International was sprung.

It will take time to attract pension to listed and direct property again. Some may even end up in property groups based abroad but listed in SA such as Sirius Real Estate and Redefine International which both operate in Western Europe.

As listed property becomes bigger than equity groups such as retail, healthcare and construction stocks in SA on the JSE, pension funds will have to pay attention. Some listed property groups could even branch into other industries such as construction when they gained enough scope and needed to find new ways to bring value to their shareholders.