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Is it sustainable to have so many listed property funds?

Will the local real estate stocks price collapse result in an overdue consolidation?
Image: Waldo Swiegers, Bloomberg

There are currently 42 funds in the ASISA South Africa real estate general category, according to Morningstar. Just 15 of those have assets under management (AUM) of more than R500m.

Thirteen have less than R50 million in assets.

Questions have been asked for some time about how sustainable it is to have this many funds focused on what is a relatively small sector of the JSE. How many of them are really offering investors a compelling value proposition?

A Citywire analysis of the sector throws some interesting light on this question.

Being different

The first point worth noting is that it is not easy to build a differentiated portfolio in a sector that is relatively narrow, and in which the smaller stocks can be highly illiquid. While taking positions away from the benchmark can deliver significant alpha, this can be extremely lumpy.

Four of the funds in this category are index funds. Two are funds of funds. As the below table shows, there is a lot of replication in the portfolios of the remaining 36.

South Africa real estate general funds
Number of active single-manager funds 36
Funds with NEPI Rockcastle as a top 5 holding 31
Funds with Growthpoint as a top 5 holding 31
Funds with both NEPI and Growthpoint as top 5 holdings 27
Funds with NEPI, Growthpoint, Redefine and Resilient as top 5 holdings 17

Source: Morningstar

Nearly half of the active single-manager funds in this category have some combination of the four biggest JSE-listed property stocks in their top five holdings. It is therefore, not surprising, that there is a high correlation in returns from these unit trusts.

Of the 40 funds in this category with a one year track record, the top-performer, the True North IP Enhanced Property fund, delivered a total 12 month return of -3.4%. The worst-performer, the Select BCI Property fund, showed a return of -44.8%.

That is a significant spread of more than 40% in just one year. However, 23 of the 40 funds – or 57.5% – were clustered in a band between -34.0% and -41.0%, which is about 3.5% either side of the SA Listed Property Index return for this period.

There is, therefore, not that much to choose between a majority of these unit trusts, or, in fact, between these funds and those tracking the index.

How we got here

To a large extent, this is a legacy of how this sector has developed. Leading up to 2017, the local listed property had been the top-performing asset class for more than a decade. The demand for property funds was therefore high.

It is noticeable that 22 of the 42 funds in this category were launched in the four years between 2013 and 2017.

The last few years of severe under-performance, have, however turned the tables on asset managers.

Ian Anderson, CIO at Bridge Fund Managers and manager of the Nedgroup Investments Property fund, has been involved in running unit trusts in this sector for more than 20 years. He was part of the team that launched the Marriott Property Equity fund in 1996, which was the first to focus exclusively on listed real estate.

‘The reason we launched that fund was a feeling that, with people increasingly using living annuities in retirement, there would be a need for a product that could provide a sustainable income stream that could grow at, or around, inflation,’ said Anderson. ‘And most of the property funds that launched during the 2000s were based on similar thinking.’

Changing dynamics

The idea that property was primarily an income-producing asset class was however upended when the South African listed real estate sector began to realise such exceptional returns, primarily due to capital gains. At the same time, investor demand surged on the basis of this past performance.

‘If you didn’t have a property fund you were going to miss out on one of the fastest growing sectors of the market, so everyone thought that they had to launch a property fund so that they didn’t lose investors,’ said Anderson.

However, the collapse in share prices in this sector has now altered the dynamic again.

‘Going from darling to pariah has taken just a couple of years,’ said Anderson. ‘There is very little retail investor appetite for listed property now.’

The question of whether the market really needs so many listed property funds is therefore now more pertinent than ever.

How many is enough?

‘I think that there are too many unit trust funds in our space, given we have maybe 42 REITs and listed property companies to choose from that are really investable,’ said Kundayi Munzara, co-manager of the Sesfikile BCI Property fund. ‘We have too many funds that really just do what the benchmark does. Our sector probably needs more differentiation between funds where clients can choose from a wider variety of strategies, from active, to passive, to ones that have more offshore exposure (outside the dual-listed ones), and to ones that are completely benchmark agnostic or have absolute return characteristics via use of derivatives.

‘Over time, I think our sector can have say 20 to 25 unit trust funds – five to 10 of them with differentiated strategies, and the rest that are kind of benchmark cognisant. At least clients will then still have a choice, but ones that makes sense.’

Anderson does not have a specific figure in mind, but thinks that ‘anything more than 20’ would be too much. He believes the pressure that managers in this space are now feeling may lead to a new dispensation.

‘I wouldn’t be surprised if, just from a pure marketing perspective, a few managers close down their property funds because it’s difficult to get flows now, and because of the cost of keeping it open,’ said Anderson. ‘I do think there are probably some managers that might look to collapse their property funds into maybe much larger income funds. We haven’t seen any of that yet, but I think there is going to be some consolidation.’

Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.

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“Is it sustainable to have so many listed property funds?” No …

“Will the local real estate stocks price collapse result in an overdue consolidation?” Yes …

There are too many unit trust funds across the board in SA – Period

And talking about the whole fund landscape in SA….we have about 1,500 funds registered in SA, and each of those asset managers apply their own selection and weighting from the current available 344 shares listed on JSE 😉 Really a meagre choice.

Seems crazy, but I understand it’s a global issue. But SA’s case is very acute, since we have so few JSE-listed shares & other securities.

It’s like having 4 basic ingredients like Baking powder, Flour, Sugar & Milk and you’re expected to use various ratios of these ingredients in order to come up with a hundred different types of cakes & tarts *lol*

All asset managers are bakers of sorts…(and many cakes flop!!)

…and spare a thought for fund managers in Zimbabwe: they have a astronomical choice of 63 stocks on the ‘ZSE’. Let’s not poke fun at Zim’s paltry listed number…give SA another 26 years of decline.

What happened to diversity? Many of us swore by properties, now the swear at properties. But I think if one has a few houses one should be OK.

My jewish friend always says: “When everyone sells, we buy, and when everyone buys, we sell”

Property like most things goes through peaks and valley’s. In my opinion, property is and will always be one of the best asset classes. Buying and selling are key and the location more-so!

There ain’t more ground being made

‘’But this long run is a misleading guide to current affairs. In the long run, we are all dead’’

John Maynard Keynes (1883-1946)

I wouldn’t touch these Property funds with a ‘’pair of plyers’’!
The physical property market is in dire straits – and in a much worse position than after t 2009 financial crisis which was primarily caused by deregulation in the financial industry.

That permitted banks to engage in hedge fund trading with derivatives. Banks then demanded more mortgages to support the profitable sale of these derivatives. … That created the financial crisis that led to the Great Recession.

I remember in 2009 Banks like Investec and RMB, had property coming out of their ears, mainly on default payments. Absa Capital got such a fright – they suspended almost all commercial property loans! I think the smaller banks like Investec could be in dire straits with their property portfolios – I heard that property prices in the up-market Bantry Bay dropped by 50 %.

I also think that cash and bonds are the only two principal investments that should now be looked at – even the ‘’Invest Off-shore’’ drums by the Fund Managers stopped beating lately!

…RMB should read FNB……

Yes and all are still defying gtavity.

Well during corona virus its not

End of comments.

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