February 2007

Investing in property on the JSE Securities Exchange

The beauty of investing in property is that so many options are available. Instead of, or in addition to forming a property syndicate to access commercial or industrial property (see our last issue), you can invest in property indirectly on the JSE Securities Exchange. This is called listed property, and there are three ways: in Property Unit Trusts, in Property Loan Stocks, and directly in listed property companies. These forms of investments are subject to movement in the equities markets but provide investors with a liquid, spread risk in property.

1. Property unit trusts (PUTs)
   
   Not to be confused with ordinary unit trust funds, PUTs are securities listed on the JSE Securities Exchange and are purchased through a stockbroker. They involve investing in companies that specialise in property investments.
   
   PUTs are accessible to the average investor because they can be purchased in low-denomination units. PUTs offer high-income returns, and are generally less volatile than equities because of the diversification of risk over a number of buildings and tenants. (Even though interest rate movements directly impact upon the market price of these securities, the income stream - i.e. interest and rental income earned by the investment portfolio - is not directly affected, mainly due to the medium- to long-term nature of lease agreements.)
   
   Unit holders' interests are protected by stringent regulatory controls, which are set out in the Collective Investment Schemes Act. Inter alia, this act allows a PUT to borrow up to 30% of its assets. A PUT may therefore make use of "gearing" (i.e. using borrowed money to purchase property) to a limited degree in an effort to enhance investment performance, but with the attendant risk of future increases in interest rates on borrowed money. For more information, visit http://www.put.co.za/
   
   
2. Property loan stocks (PLSs)
   
   By investing in a PLS you are investing in a company with a portfolio of properties that are listed on the JSE Securities Exchange. PLSs are more risky than PUTs because they are allowed to use financial gearing to an unlimited extent. It is this greater flexibility which increases the risk profile of the PLS company, as rising interest rates will mean higher overhead costs for the company with resultant lower distributable earnings. For this reason PLSs are perhaps more suitable to the investor with a less conservative investment risk profile.
   
   Returns from PUTs and PLSs are earned in two ways: you share in a proportion of the income that is earned by the listed property entity, and from the growth in the value of the listed units on the stock exchange. The income from PUTs and PLSs is distributed to unit holders as "dividends", which are taxable in the same way as interest earned on a fixed interest investment. With the decline in interest rates over the last couple of years, both PUTs and PLSs have shown a very strong performance.
   
   
3. Shares in property companies
   
   This is the third type of investment instrument listed under the property sector of the JSE Securities Exchange. A property company is merely a company whose assets mostly comprise fixed property. Trading in its shares take place in the normal way. Unlike PUTs and PLSs, a property company is subject to tax on its net earnings and any dividends paid to shareholders are exempted from income tax in the hands of the shareholder.

Mortgage participation bonds

Mortgage participation bonds are not in the category of listed property, but are worth mentioning in our discussion on property investment. They are also known as part bonds, and you can invest in a part bond by lending money to people who want to invest in property through a third party, such as a financial institution or a company that specialises in property investment. Part bonds are attractive to the conservative investor because they are generally low risk, being subject to stringent regulations. They provide a steady income stream from interest, as well as capital preservation. Ask your broker for more information.

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