Over the last couple of years the way that local listed property indices are put together has come under a lot of scrutiny. A number of investors, asset managers and academics have expressed concerns about their construction.
The issues raised include the high concentration in the South African Property Index (Sapy) of big stocks such as Growthpoint, that the index is unfocused as it includes both real estate investment trusts (Reits) and property development companies, and the fact that inward listings are excluded.
The JSE therefore initiated a process of consultation with the industry about what they would like to see from local property benchmarks. This began last year and has now led to the exchange releasing a proposal for discussion.
“It was interesting in that it was the most commented consultation that we have ever done,” says Mark Randall, the manager of indices and valuations at the JSE. “There were clearly a lot of different people using the Sapy for very different reasons – active managers using it as a performance benchmark, passive index trackers and academics.
“What was very interesting for us was the real range of types of users and their interests,” Randall adds. “Some were saying that this is the South African Property Index and they want access to South African property, so anything offshore shouldn’t be in the index. Others were saying that they want anything listed in South Africa, regardless of where it’s based. It was clear that we had reached a maturity in the market where a one-size-fits-all all approach didn’t work for everybody.”
Three new indices
The JSE therefore realised that it needed a new approach, and its proposal is to implement three different property indices. These would replace the current Sapy and the Capped Property Index.
“The first will really target South African real estate investment trusts (Reits),” Randall says. “This is for the investor looking for South African management, South African companies, and mostly South African property.”
This index would look most similar to the current Sapy as it would continue to exclude foreign Reits such as Intu. It would however exclude property development companies, such as Attacq, which are in the current index.
The second index proposed by the JSE is an ‘All Property Index’, which would include foreign property companies for the first time.
“The target would be investors who don’t really care where the property is, where the assets are, or whose managing it,” Randall explains. “If they can buy it and sell it in rands, they want it in their benchmark.”
This is likely to be favoured by those who need a broad performance benchmark. The proposal is also that this index would be shareholder weighted, which means that while it brings in the foreign companies it does so at a weighting that represents their South African shareholder base. This will prevent it from being dominated by foreign counters.
“The third variant would have a focus on liquidity,” says Randall. “What we want to do is take the All Property Index and only include a subset – those counters in the large and mid cap indices. The thinking there is to get an index that will support a derivative contact on the exchange. At the moment we don’t have any active derivative contacts on Sapy, so we need one that can absorb the kind of volumes you need in that product.”
This would therefore exclude the smallest property companies to ensure that the index is liquid and tradeable.
The JSE has also suggested that any, or all, of these indices could be capped so that no one counter could make up more than a certain percentage of the index. The discussion document shows an illustrative cap of 15%, but Randall says that different people will have different ideas as to what is suitable.
Simon Brown of Just One Lap believes that these proposed changes are very positive. He is particularly pleased that the JSE is suggesting an index that includes foreign Reits.
“I like the idea of an index that includes the global companies,” he says. “An argument can be made that you need a local index, and I hear that, but let me invest in what’s available. It’s more broad and I think that’s a good thing.
“Having a pure local property index and then others including offshore counters is a great idea so that investors can decide which they care about,” Brown adds. “This is of course dependent on exchange-traded fund (ETF) issuers coming to the party, but I think they likely will and issue ETFs on the different indices. The idea of capping weightings is also an excellent idea and I would favour a 10% cap.”
Sesfekile Capital’s Evan Jankelowitz is also pleased that there will continue to be a purely South African index and that the All Property Index will be shareholder weighted.
“We need to give our local funds some measure of protection because there are a lot of guys coming from offshore to raise money at the expense of the local stocks,” he says. “We do need the optionality of picking across the spectrum, but at the same time we need some protection in place and a limit on the exposure of foreign stocks in the index.”
The full proposal from the JSE can be viewed here.