*Making sense of physical property versus property funds *
I recently sat amongst a hot debate in one of my favourite restaurants in
Johannesburg where the samples of both red wine, and our meal, depicted the
conversation - bold, flavourful and larger-than-normal in size! The topic at
hand was the choice to invest in physical property, or property funds as listed
on the JSE. The topic remained with me the following day as I deliberated the
various strengths of each argument (while at the same time, the various
strengths of each bottle our table consumed).
Listed property funds are essentially a portfolio of different types of
properties and, one of the most probable advantages of this is that an investor
is exposed to diversification far easier than if the same diversification were
looked for in physical property. Further, the amount of liquidity needed to
purchase property funds is very low in comparison to physical property; an
investor who purchases physical commercial property is usually required to place
about a 30% deposit on the property. This is often substantially large
(depending on the initial price of the commercial property) and so, investors
may choose to rather purchase residential property for buy-to-let purposes
(however, the return on investment, due to a smaller capital outlay, would be
smaller). Should an individual choose to purchase listed funds (unit trusts or
shares on the JSE), the minimum amount that must be purchased is 100 units, and
subsequently, the price would be determined by the current price per unit (at
current levels, the average outlay for a listed property fund may hover anywhere
between approximately R500 - R3000).
Investors looking for a smaller capital outlay (similar to that of listed funds)
may choose to rather purchase physical residential property, as it is possible
to receive a 100% or 108% mortgage bond as an appropriate means to avoid any
large initial capital outlays. But, it is important for the investor who chooses
this physical residential property to realise that although a 100% (or 108%)
mortgage bond may suggest no initial deposit, a large line of credit will still
be attached to his/her identity. According to Standard Bank house price data,
the median price for a house in South Africa hovers around the R530 000 level so
far for 2007. As a result, for investment purposes, the monthly instalment
required on this loan size will need to be somewhat matched with the rental
yield received for the property, if a cash flow positive physical property
investment is what is sought-after.
An additional difference between physical and listed property is the management
thereof; listed property comes with its own set of fund managers, while the
initial purchase of a physical investment property will lie in the hands of the
holder and their own personal access to information and advice on where to
purchase (however, fund managers do come with certain administration fees).
From an economic point of view, a simple cost-benefit analysis should be done by
any individual considering both investment options. And, other than the plain
black-and-white differences between both choices, the more intangible personal
preferences of the investor must also be taken into account - e.g. risk
appetite, ability to give time for administration requirements, level of
'hands-on' ability, etc. The gains for both investment types can be significant;
however, this all depends on the amount of activity that takes place in both
markets, together with the initial capital outlay and the level of involvement
of the investor.
That night, the main crux of the discussion came down to the mere fact that
where physical property is more hands-on, listed property is determined largely,
and reacts more quickly, to market speculation. As a result, although the
physical property market is somewhat slower in reaction to that of the listed
property market, the general benefits of either one are exclusive to each
investor's unique needs and personal view on risk and administration. If my
memory serves me as well as the maître d' served our table, the concluding
remark before moving onto dessert was that, similar to the red wine we were
sampling, property becomes a more interesting and discussed investment with age
- whether it by physical or listed.
