LISTED
Real Estate Stocks
Alternatives to traditional home ownership
BY ROB HART
F or most families , the largest asset they own is the residence they occupy . They buy a property in the desired location , and pay off the mortgage of many years , which in large proportion of cases leads to a nest egg to use for retirement . This has several advantages , including forced saving ( through paying the mortgage ), property typically appreciates through the longterm and provides an inflation hedge , and there are often tax advantages .
An attractive alternative to physical residential property is listed property equities . These are the stocks of property companies , usually real estate investment trusts ( REITs ), which own various types of property ( including office , retail and residential ) in different locations globally and paying out the majority of their rental income as dividends .
There are various advantages to this structure over traditional home ownership :
Higher liquidity – stocks trade in the open market daily and so a position can usually be liquidated relatively quickly , as opposed to the physical property market where one can wait months or even years to dispose of an asset . If you need money quickly for some foreseen event , then trying to sell your house in a hurry can result in a low selling price .
Lower transaction costs – buying or selling a house will typically involve agent fees of 5-7 % along with property transfer duties of up to 10 %, whereas trading at stock will cost a fraction of 1 %. Outsourcing the rental and upkeep of a property usually costs at least 10 % of the rental income per annum , whereas a fund will usually charge you around 1 % of the portfolio value per annum to run your portfolio .
Increased diversification – when buying a single property , you are “ all in ” a specific location and sector , which can be very profitable , but also involves substantial risks . Owning a portfolio of listed equities allows you to spread your risk across different locations and sectors and mitigate the possible downside , allowing you to sleep better at night .
Provides a currency hedge – you can buy a stock listed in most larger countries around the world , so if most of your assets are exposed to a volatile currency , such as that of an emerging market , then you can buy assets with a stable currency through listed real estate stocks to combat your net worth getting hit by your local currency weakening .
To illustrate the efficacy of investing in listed real estate , please see the chart below . Over the last 7 years the index has returned about 10 % per annum in USD , including an annual dividend of 3.5-4.5 %. This is significantly superior to the return of the South African residential property market at around 2 %.
As a result of these advantages , institutional and retail investors are increasingly opting to put a portion of their assets into listed real estate . At Fairtree Capital we run a global developed market real estate fund , which combines the advantages above with our top-down led investment process and experienced team , a concentrated portfolio of best ideas , a comprehensive team of operational and support staff and efficient trading with low costs .
Global Real Estate vs South African Residential Property Prices *
* ABSA capital value data assuming an initial income yield of 5 % growing 5.5 % annually
Rob Hart is the Global Real Estate Portfolio Manager at Fairtree Capital
60 SEPTEMBER 2017 SA Real Estate Investor Magazine