Property trusts are a very much neglected investment area for the average investor. Why this is the case is not exactly clear. While property trusts generally have not risen at the same pace as the other “glamour” sectors on the Johannesburg Stock Exchange, the property trust sector has outpaced the inflation rate by a comfortable margin.

During this time the property trust index rose at an annual average rate of 16,8% compared with the average inflation rate of 14,8% over the same period.

Although the average return was less than the return of other sectors on the JSE, property trusts are considered far less risky as price movements are much smaller and far less volatile. During the whole Great Crash of ‘87 the property sector recorded a much smaller drop than most other sectors and recovered far quicker. This was due to the fact that the income-stream of the property trusts were determined well into the future.

Funds Investing

Property trusts are very similar in nature to equity trusts. The only difference is that investments are made in prime commercial, industrial, retail and residential properties. A great number of large commercial buildings in the larger cities are owned and managed by the 14 authorised property trusts.

Despite possible problems regarding valuations and a rather pedestrian income growth compared with other investments in the JSE, good property trusts have all the unique benefits of property in general and investors have these extra benefits which they do not get if buying property directly:

  • The opportunity to take part with as little as $50.
  • The ability to cash whole or part of their investment almost immediately. Provided there are buyers for your units, you will be paid out almost immediately by the stockbroker who sold your trusts.
  • No problems with management such as vacancies, tenant worries or repairs.
  • No direct liability for rates and taxes.
  • No complicated record
  • The prices of property trusts are published daily, making it easy to follow your investment.
  • Professional management expertise.
  • The ability to take part in multi-million rand commercial, retail and industrial property investments such as shopping centres and city skyscrapers.
  • The chance to spread investments over different property types and locations to minimise risk.

Remember that property is a long-term stable investment and is likely to provide predictable conservative gains rather than spectacular highs or lows. Shares will always tend to be volatile but good quality, well-located property with substantial tenants on long leases will continue to provide a reliable income and sound capital growth over the long term.

It is true that the property trust concept can be abused so, when you are considering trusts in which to invest, you need to do a great deal of research to determine which ones will perform best. I believe that this is very difficult for the average person and it is easier to seek out expert advice. Good investment advisers and stockbrokers can provide information from their own research departments. However, good performances in the past do not guarantee good performance in the future, and the adviser should be concentrating on the POTENTIAL of a particular trust and not its past history. This is the real test of good advice.

Ask the following questions:

  • What type of property is the trust buying?
  • In what geographic area is the trust going to invest? Is the trust going to be borrowing? If so, how much?
  • What is the growth pattern in the location of the properties? What track record do the managers have?
  • How substantial are the tenants?
  • How long are the leases?

An important feature of property trusts is that it pays no income tax on its income. Apart from management fees and other expenses all income is passed on to unit holders. This results in property trusts having a far higher income distribution than other shares or units on the Johannesburg Stock Exchange. Property trusts outperformed the overall market on average dividend yield, yielding an average of 8,6% compared with 5,6% for the JSE overall market.

For investors in lower income-tax brackets this is an important consideration, as the dividend yield will be taxed very favourably, thereby increasing the overall attractiveness of property trusts.

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