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Why invest in property?

The property investment outlook has been bolstered over the last couple of years by a number of factors including a volatile/declining equities market and good returns from property investments. This has generated renewed interest from investors in property as an asset class.

Fundamentally property is an increasingly important asset class, which should be considered for many reasons, including qualities such as:

  • Determined cash flow
  • An inflation hedge
  • Future appreciation
  • Low volatility
  • Competitive total return
  • Diversification – low correlation to stocks and bonds – a hybrid that can raise returns and lower risk
  • Significant portion of the investment universe (generates, GDP, taxes and jobs)

The literature is abundantly clear that commercial property has been long considered one of the best inflation hedges and in fact one of the principal arguments for including real estate in pension fund mixed asset portfolios. Not all commentators have agreed on the extent or degree of inflation protection provided by property.

Inflation essentially implies loss of investment value over time, which potential loss investors seek to outperform by way of the investment’s current and future capital and income growth (total returns). Naturally, when the market is strong, positive property rental growth leads to further capital growth. It is principally the income growth stream driven by net rental escalation clauses that assists in locking in inflation-beating growth, ensuring that real estate remains one, if not the best, inflation hedging asset classes.

For numerous sound reasons, property is an asset that is conducive for retirees and pension funds in particular:

  • Returns typically meet actuarial assumptions of return.
  • It is a long-lived asset consistent with pension liabilities.
  • Underlying income streams are derived from contractual commercial leases.
  • Listed property multiples are attractive compared with general equity shares.
  • Dividend yields are comparatively attractive.
  • It is less susceptible to rapid peaks and troughs.
  • Asset allocators will generally seek out initial dividend yields 2-3% above those of long-term bonds, with consistent growth in dividends of 4-5% per annum.
  • Property satisfies the risk profile of pension funds fitting neatly between bonds and equities on the risk/return frontier.
  • Direct property benefits include greater control of assets and the opportunity for active management and value enhancement.
  • Listed property benefits include diversification; no direct property management responsibility, the capture of third party enterprise value; and economies of scale.

Property should form part of the asset allocation of individuals and institutions because it provides a stable annuity in the form of rental income. Unlike fixed interest, it offers the prospect of increased income as well as some of the capital growth that equities can offer.

Article From: www.moneymax.co.za