Do you think it’s a good idea to invest in the South African property market in the form of an index fund given the current conditions? It is clear that the property market is struggling as can be seen with the losses on some of the larger property funds. But do you think it would normalise in the next year or two? Possibly even provide good returns over the next five years if it climbs back to pre-Covid levels? I was looking at this as part of a TFSA [tax-free savings account].
Thank you for your question!
2020 sure taught us the lesson that what we once thought is a secure investment can literally change overnight. The story of property is one that we are all quite curious to see how it will play out. Large, incredibly impressive corporate buildings are standing empty. Home offices have become the new normal and also will stay for quite some time … What the world will really look like post-Covid-19, nobody knows at this moment. I do believe many ways of living will change forever.
When it comes to asset classes, property is only one of many to consider. On a valuation basis, property does show upside potential, however, there is a large degree of uncertainty as was mentioned above, which can lead to continued underperformance or negative returns. The sector is very volatile with a larger array of outcomes and any exposure should be positioned accordingly in the context of an overall portfolio.
It’s important to remember that one asset class should not be seen as a replacement for, or as an alternative to, another. Nor should past performance be your main motive for investment.
I would rather advise you to always follow a diversified approach – by including all asset classes in your portfolio.
Asset classes behave in different ways in market cycles, and therefore, including all of them in one way or another in your portfolio will diversify your risk and your return optimally.
If you are specifically looking at a TFSA, I would advise opting for higher exposure to growth assets (equity exposure). The main benefit of a TFSA is the fact that there will be no tax payable on proceeds in the future, which is a great benefit on any growth asset as you don’t have to be concerned about any CGT payable in future.
You also don’t have any regulatory restrictions in terms of equity or offshore exposure. Therefore, you can diversify your total portfolio quite well in your TFSA by investing 100% in equity exposure, benefiting from the longer-term nature of the investment.
A TFSA has an annual limit of R36 000, and a lifetime limit of contributions of R500 000. Ensure you maximise your annual limits, as well as the lifetime limit. It will take around 14 years to reach the lifetime contribution limit if you contribute R36 000 each year. Therefore the more time you have for a TFSA, the bigger the tax benefit.
Most local and global equity funds have some property exposure as part of their overall asset allocation, so this can be a good way to gain exposure in these uncertain times.