An investigation into the impact of listed property (property unit trusts) in a diversified investment portfolio in South Africa.

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.