If you count yourself among many South Africans who love property, you’ll be happy to hear you don’t need millions to become a property owner. This week we tell you how the CoreShares Proptrax Ten ETF can turn you into a property mogul.
Investing in the Proptrax Ten ETF
You’ve probably heard of someone who made a fortune in the property business. Unfortunately, those stories never include details of deals gone bad, wonky buildings and nightmare tenants who never pay rent on time. Investing in physical property comes with its fair share of problems.
Thankfully there are companies that manage property investments on behalf of shareholders. Different property investment companies also invest in different types of properties. Some build and manage office buildings, others develop and sell apartments and townhouses.
Tip: We explain what property investments are here.
Property companies use investor money to buy property and run the properties they already hold. Money earned from the property, like the rent collected or the profit on the property in case of a sale, is distributed among the company’s investors.
The CoreShares Proptrax Ten ETF invests in ten JSE-listed property companies. Each company is represented equally in the ETF, not by market capitalisation. As we discussed before, this means you make money even when the smallest of these companies do well. As an investor, you receive a quarterly payment from the income these property companies earn.
This ETF is invested in companies that hold physical properties. Just like owning a second home or an apartment with a tenant, the properties continue to exist independently of what the market is doing. This is great, because if your share investments do poorly in the market, your property investment can continue to make you some money.
Furthermore, because it is invested in different companies that hold different types of properties in different areas around South Africa and the world, you don’t run the risk of losing all your money when a certain type of property becomes less popular.
You can invest in this ETF using your tax-free savings account (TFSA) and you can invest what you can afford every month, saving you the trouble of borrowing money to buy physical property.
Weekly expert: Tom de Lange
Each week we ask an independent expert to give us the low-down on our featured ETF. We ask each expert what sets the featured ETF apart from others; what investors should think twice about before investing in the ETF; and what type of portfolio could benefit from holding the ETF. This week, TC van der Walt, fund manager at Emperor Asset Management, shares his thoughts on the CoreShares Proptrax Ten.
What differentiates the Proptrax Ten from other ETF products?
Currently the portfolio has 11 constituents, with Fortress A and Fortress B counted separately, although the combined weight of the Fortress fund is around 10.2%. Over the last year or so, the Proptrax Ten ETF has beaten its sister ETF, the Proptrax SAPY by about 6%. This is largely as a result of the lower weighting in Growthpoint, which has underperformed the index by about 18%. Proptrax Ten also benefited from the stellar performance of the Rock Castle Global Real Estate fund with a 10% weight compared to 4.9% in Proptrax SAPY. In general therefore, Proptrax Ten offers better differentiation than other market capitalisation weighted property ETFs, which can lead to better performance. In comparison with general equity ETFs, it offers a very attractive dividend yield.
What limitations should investors be aware of?
Listed property should be viewed as a hybrid between general equity and local government bonds. As such, unexpected interest rate hikes can influence the price of listed property investments negatively. This happened in June 2006 when the SARB unexpectedly hiked interest rates with 1%, causing a 26% decline in the Proptrax SAPY ETF. Proptrax Ten would have reacted no differently. In addition, the dividends paid by property ETFs is considered as interest receipts in the hands of local investors and are thus fully taxable. Finally, listed property should be viewed as a value style of investing, which implies underperformance during late bull markets and early bear markets. On the other hand, outperformance is to be expected during late bear markets and early bull markets.
What type of portfolio would benefit from holding the Proptrax Ten ETF?
It is ideal for a long-term investor who desires long term capital growth AND a handsome income. However, keep in mind that the income is fully taxable, so investors with lower marginal tax rates should benefit more. In a tax-free ETF environment, Proptrax Ten is ideal for all investors. Generally, the SA Listed property sector has delivered excellent returns above inflation over the long run with slightly lower volatility than the JSE all share index. It is a cornerstone for ETF investments and recommended for all ETF portfolios.
Proptrax Ten unpacked
|ETF name||CoreShares Proptrax Ten|
|ETF JSE code||PTXTEN|
|Issue date||30 May 2011|
|ETF benchmark||FTSE/JSE SA Listed Property Top 10 Equal Index|
|Tax-free savings account?||Yes, can be included|
|ETF major holdings||Resilient, Rockcastle, Redefine, Attacq, Growthpoint, New Europe, Hyprop, Fortress B, SA Corp, Fortress A, Vukile|
|Performance||1 year -0.9%
3 year + 34.4%
5 year + 78.0%
|What we like||With its investment in physical property, this ETF protects your investments when the stock market is unpredictable.|