An investigation into the impact of listed property (property unit trusts) in a diversified investment portfolio in South Africa.
Date
2009-01-22T08:30:36Z
Authors
Sebehela, Tumellano
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Abstract
Investors seek to maximize the overall returns of diversified investment portfolios. That is, ideally
investors would like to receive increasing risk-adjusted returns over a given period. In order to
achieve this they allocate different percentages in different asset classes to form diversified
investment portfolios.
One of the asset classes that is considered for asset allocation is property. When allocating the
property component, an investor has a choice of investing in either direct-held properties or listed
properties. This research report focuses on listed properties, and property unit trusts (PUTs) will
be the main focus not property loan stocks (PLSs).
The literature (national and international) consensus is that listed property can be equity security,
fixed-income security or hybrid security in a diversified investment. However, the dominant
school of thought is that listed property funds has similar characteristics supported by empirical
studies by Myer and Terris (1995), and Friday and Higgins (2000) and the less dominant school
of thought is that listed property has gilts characteristics supported by empirical study by Kuhle
(1987). Most of those empirical studies were undertaken in United States of America. At the
moment, in South Africa (SA), there hardly any empirical studies comparing listed property funds
and other asset classes expect a few real estate analyses by real estate analysts such as Leon
Allison from First South Securities (South Africa) which show high positive relationship between
listed property funds and bonds.
Directly held property is a complex asset due to its physical structure, types of property, and
natural forces and factors that affect land. Proper and efficient maintenance contribute to the
value appreciation of property. When you diversify through usage of directly held property, it is
better to have a limited the number of properties included in a diversified investment portfolio in
ii
order for them (physical property) to be manageable. The more physical properties you have in an
investment portfolio, the more people needed to manage those physical properties. More
importantly, physically help property has direct impact on the listed property fund. Tax changes
can either persuade or dissuade people to invest in property market.
In attempting to establish whether or not PUTs increase the overall returns of diversified
investment portfolio conclusions were drawn from literature survey, research findings and
hypothesis testing. There was no conclusive evidence suggesting whether PUTs enhances overall
absolute returns; however, listed property funds reduce risk of the diversified investment
portfolios. In certain case, as shown by Kuhle (1987), the more assets investors include their
investment portfolios, the more risk reduction is prevalent in diversified investment portfolios.
Other studies such as Friedman (1971) showed the inclusion of listed property trusts in a
diversified investment portfolio minimizes maximum losses and earns reasonable returns.
Therefore, listed property is a hybrid security and diversification does not necessarily increase
after risk-adjusted returns but does reduce risk.
From available data, the hypothesis test confirmed that introduction of PUTs in a diversified
investment portfolio does not necessarily increases returns. The research report further confirmed
that listed property funds have both characteristics of equities and fixed-income securities.
Going forward, having a diversified investment portfolio is an advisable strategy especially in
case of unforeseen market conditions. Diversified investment portfolios works more like
defensive stocks because investors make minimum losses while making reasonable returns during
unforeseen circumstances.
Historically the property market has outperformed other markets. Finally, diversification seems
not to increase the overall returns of diversified investment despite decreasing the risk of
diversified investment portfolio.