Index construction affects returns

If you choose to invest in listed property using passive investments, you need to understand the criteria used to construct an index, because the constituents of the index affect how an indextracking fund performs.

The traditional benchmark for domestic listed property is the FTSE/JSE SA Listed Property Index (SAPY). This index captures the performance of the top 20 property companies, by market capitalisation (value of publicly issued shares), with a primary listing on the JSE. The SAPY does not cap the weighting of any particular share, and it excludes companies with a primary listing offshore.

A “property company” means a company listed in the “real estate investment and services” or the “real estate investment trusts” sector of the JSE.

One of the criticisms – and risks – of tracking the SAPY is that, although it gives investors exposure to 20 shares, five shares account for about 65 percent of the market capitalisation of the index, Len Jordaan, the head of exchange traded funds (ETFs) at Stanlib, says.

Commentators have pointed out that companies can choose the JSE as their primary listing simply to be included in the SAPY. New Europe Property Investments, which is one of the “big five” shares in the index, is based in Romania and does not own property in South Africa.

Of the five index-tracking funds in the South African real estate general sector, four funds track the SAPY. The CoreShares PropTrax Ten ETF tracks a bespoke index, the FTSE/JSE SA Listed Property Top 10 Equal Index. The index consists of the top 10 companies, by market capitalisation, in the SAPY but holds them in equal weightings of 10 percent.

Gareth Stobie, the managing director of CoreShares, says weighting the constituents of the index equally attempts to correct the concentration risk in the SAPY by down-weighting large shares, such as Growthpoint and Redefine, while upweighting smaller shares.

On a total-return basis, the PropTrax Ten outperformed the CoreShares PropTrax SAPY Fund over one and three years to the end of June 30, according to ProfileData (the PropTrax Ten does not yet have a five-year history).

Stobie says the yields on the larger shares have been lower, so down-weighting them in the PropTrax Ten has served to push up yields in the fund.