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Friday, June 1, 2007
The direct versus the listed debate

What is the best route for a client to take who is looking to invest in real property, or real estate as it is known internationally? Should he make a direct investment into property – the buy-and-let option, or would he be better off placing his money into a listed property vehicle?

Of course, the short answer is that it depends on the investor, what other assets he has and what his investment objectives are. But let’s have a look at some of the differences between these two types of investments and the factors that a client needs to take into account in reaching his decision.
Firstly, listed property refers to Property Unit Trusts (PUTs) and Property Loan Stocks (PLSs), which are professionally managed portfolios of property and are listed on the JSE Securities Exchange. An investor buys units (in the case of PUTs) or shares (in the case of PLSs) in these listed and highly regulated entities.
A direct property investment implies that the client buys the property himself and owns it directly. This is often called the “buy-to-let” market as the investor is not using the property as his primary residence, but rather to earn rental income.

Factors to consider Listed Property Investment  Direct Property Investment
Capital required Investors can purchase small quantities of the units or shares. The minimum quantity is 100 units. Depending on the company or collective investment scheme, the minimum investment could fall (approximately) to between R100 and R2 000. The capital outlay will depend on the property sector (office, retail, industrial or residential) and whether or not the investor has partners in the venture. However, if we take residential (which is generally cheaper than the others in terms of R/m2) the median house price published in the April 2007 Standard Bank Residential Property Gauge is now R580 000, for example, a significantly larger sum than required for investing in listed property.
Risk factors: diversification PUTs and PLSs invest in well-diversified portfolios in different geographic regions as well as in different market sectors. This spreads the risk for an investor substantially. The investor is also able to participate in all of the retail, commercial and the industrial cycles. Unless an investor has an extremely large capital base, it will be very challenging to acquire the same degree of diversification as listed property. It may also be impractical for an investor to have a spread that is both geographic and sectoral.
Risk factors: liquidity Listed property is traded on the JSE Securities Exchange. As such, the investments are highly liquid: a client can sell his stock and realise his funds within a week of making the decision to sell. Direct property may take some time to sell. Finding a buyer for the specific property can pose a problem for a seller, as well as incurring expenses. In addition, there can be a significant time delay between the decision being made and the investor realising his funds.
Maintenance This is handled by professionals and investors are free to focus on other issues. The investor/owner must either perform this function himself, or he will need to pay building maintenance specialists to do it.
Rent collection This is another aspect of the investment which is handled by professionals. Again, the investor needs to perform the function himself, or pay professionals.
Practical uses of the investment The major practical advantage of owning listed property is that an investor can gear to an extent against the investment by going to a bank for a loan, as listed property generally pays out attractive distributions. The benefits of gearing are generally known to investors and it is a device employed when purchasing residential property. In this instance, investors can also gear against the purchase of the property with the concomitant benefits. Over and above this, if the investor has bought residential property, and if all else fails, he can at least make a home out of the investment.

One of the main reasons to invest in listed property is to get access to opportunities in professionally managed real estate that has sectoral and geographic diversification, with the potential of both decent distributions and capital appreciation, which are otherwise difficult for an investor to access.

Copyright © Insurance Times and Investments® Vol:20.5 1st June, 2007
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