Direct property investments ‘a risky bet’

Investors eyeing real estate portfolios are better off investing in listed property or real estate investment trusts (REITs) as returns from direct property investments have been weakened by current inflationary pressures, experts say.

The local property sector has generally lagged exchange rate effects.

But listed property has outperformed direct property investments over the past five years.

“Listed property has outperformed direct property over the five-year period. Listed property is trading at a premium to book values (1.5x PBV),” Old Mutual Investment Group general manager (property boutique) Bevin Ngara told a Zimbabwe Association of Pension Funds meeting recently.

“The performance of the listed property appears strongly correlated to Zimbabwe Stock Exchange (ZSE) returns than it is to underlying performance of the properties themselves.”

This comes as pension funds — which currently hold extensive property portfolios — have continued to pile into this segment as concerns remain over an inflationary environment.

Official figures show that for the local pensions industry, investment property’s share of total assets stood at 46,83 percent as at the close of 2020.

“Tension is building between trustees and fund managers. Fund managers see the risks associated with direct real estate such as illiquidity, valuation issues, and poor diversification,” said Ngara.

“Trustees see loss of pension purchasing power, and go by the behavioural notion that you cannot go wrong with property. Some new entrants are carving out a niche with property development opportunities, but often overlook the total portfolio perspective when selling these to pension funds.”

Although listed property firm tend to have greater diversification (concentration risk) and greater liquidity than direct property investments, they are also facing challenges of a weakening local real estate market.

“Companies overly exposed to central business district (CBD) offices have been recording high void rates. Mashonaland Holdings although diversified across five sub-sectors is extensively exposed as 65 percent of its total portfolio are office spaces in the CBD.

“However, Mash Holdings intends to convert Charter House to a boutique hotel and is developing a housing project in Bluff Hill. First Mutual Properties also has 45 percent of its portfolio in both office parks and CBD offices,” said analysts at stockbrokers Morgan & Co in a research note.

“While office parks have a lower risk than CBD offices, there is a growing preference of suburban offices. Zimre Property Investments has a 42 percent exposure to CBD offices.

“However, it has been embracing new trends given that it sold off Zimre House in the Harare CBD, converted Nicoz House in Bulawayo to student accommodation and constructed Sawanga Mall in Victoria Falls. Dawn Properties has zero exposure to the office sector. However, we remain cognisant of the risks threatening the tourism industry.”

But REITs will present another dimension to Zimbabwe’s property investment asset class.

A REIT is a regulated investment fund that enables pooling of funds for the purpose of investing in real estate, which provides a gateway to invest in sufficiently diversified portfolio of properties.

Last year, Government promulgated regulations that give guidance on REITs as well as putting in place a number of incentives.

General notice 469 of 2020 declared securities issued by REITs as securities for the purposes of the Securities and Exchange Act.

“I removed the income tax from Real Estate Investment Trusts. The problem we have been having is that if you look at their portfolios, our pension funds have huge exposure to the property sector,” said Finance and Economic Development Minister Mthuli Ncube last December.

And although the local property market has been facing valuation challenges, which has seen pension funds (in particular) losing value on their property investments, experts say REITs can skate this problem.

“REITs also solve the valuation dilemma because they are exchange tradeable.

“Different REIT themes allow investors to build real estate portfolios to achieve the desired risk and/or return profiles,” said Ngara.

“Pension funds can contribute into REITs in kind by transferring current property holdings into REIT Funds.”-herald.co.zw