Listed Property Investment in a Diversified Portfolio in South Africa

Abstract

South African listed property investments illustrate a strong historical track record of providing favourable risk adjusted returns, portfolio diversification and the ability for investors to benefit from both capital and income growth. Acknowledging that the South African listed property market is significantly smaller than its global counterparts, this study reviews the relationship between listed property and the All Share Index, the All Bond Index, the Financial Index, the Resources Index and the Industrial Index in order to determine whether diversification potential exists between these asset classes. The study further considers any long term inflation hedging ability that listed property provides. The literature review on the relationship between listed property and various asset classes offered varying results, as these are dependent on both timeframes and the prevalent economic climate. Additional relationships that were reviewed include (but not limited too) the inclusion of listed property in the overall market index, the role of information sharing, the beta effect, the relationship with the foreign exchange market and population dynamics. The study adopts the cointegration of time series approach by using the Engle Granger methodology. This involved testing for the presence of unit roots and converting non stationary financial data to a stationary form. Cointegration analysis determines whether there is a long term equilibrium position which is mean reverting (deviations from the mean are temporal in nature). Historical data was generously supplied by Catalyst Fund Managers. Further data sources include Statistics South Africa, INET Bridge and the JSE Securities Exchange. The research results establish that over the study period (varying between 13 and 18 years) listed property offered portfolio diversification when combined with the All Bond and the Industrial Index. On the contrary, portfolio diversification was not evident when listed property was combined with the All Share Index, the Financial Index and the Resources Index. A significant finding of the study is that listed property does not provide a hedge against inflation. Areas of further research (which are recommended) would be an extension to the existing study and reconfirm the test results.