Over the last 15 years, property has delivered strong returns that have outperformed just about every other asset class. This has established property as a mainstay in the portfolios of astute investors. 

Before this boom, property was somewhat of a mainstream investment pariah. “Prior to 1992, returns from this asset class were closely linked to the bond market and interest rate cycles. While this gave investors a low-volatility investment option, returns were comparatively low. As such, property was largely considered a 'widows-and-orphans' asset class due to the dominance of pension funds in the sector,” explains Darryl Mayers, Joint-CEO of the Investec Property Fund.

Today the property value proposition is vastly different. “A  decoupling of asset valuations and performance from bond yields, property stocks and the interest rate cycle have created unprecedented opportunities to outperform the market,” elaborates Andrew Wooler, Joint-CEO of the Investec Property Fund.

“Investors also appreciate the physical, tangible nature of the asset, and it is a lot easier for retail investors to understand this asset class than the bond market, for example,” continues Mayers. These attributes have over the years attracted a certain type of investor for the returns that property offers. 

The robust fundamentals that now underpin investing in local institutional-grade properties over the long-term have also attracted the interest of asset managers.

“Commercial, industrial and retail properties that benefit from in-built annual rental escalations have been particularly attractive as these assets deliver fantastic inflation-beating returns,” adds Wooler.

In this regard, Wooler says retail property has been a standout performer over the last 10 years. The sector has experienced significant development in response to the rise in consumer spending, which has fuelled demand.

 “Commercial, industrial and retail properties that benefit from in-built annual rental escalations have been particularly attractive as these assets deliver fantastic inflation-beating returns."

“The trend has also seen fierce competition among the country's major retailers as they've jostled to secure prime locations and grow market share. And with big-name anchor tenants in place, retail properties have attracted a diverse mix of tenants, with robust demand pipelines that have maintained strong occupancy rates.”

Constructing property portfolios with this composition has, therefore, worked in investors' favour during the market bull-run experienced over the last decade and a half. During this period, investors benefited from strong capital growth on the back of significant asset appreciation, while strong rental demand fuelled above-average escalations to deliver robust income streams.

“During this boom period, it was hard for any investor with capital, be they retail or institutional, to get property investing wrong. However, the tide is turning. Under the weight of prevailing macroeconomic factors, the local property bull run is over,” cautions Wooler.

Myriad factors, including anaemic GDP growth, credit downgrades, the country's ballooning debt burden, constrained lending and low liquidity levels, and a general oversupply in the market, have all impacted the sector.

In this environment, residential property prices have turned negative in real terms when adjusted for inflation, while commercial property hasn't fared much better. As a result, the sector finds itself in a soft market that is likely to persist into 2019 given the low prospects of an economic recovery.

This means property investment returns will be hard to come by. However, investors with the right management approach, an intelligently-constructed portfolio and a long-term view are ideally positioned to weather the volatility.

Before the 2008-2009 financial crisis, location favourability determined the strength of a property investment. Today, though, the dynamic is different. It's about location, in addition to the quality of tenants and the fundamentals that underpin the asset's value.

This not only pertains to a property's inherent value as a fixed asset, but also additional features and attributes, and the intuition and experience of the management team. “Retailers, for example, are under pressure because the South African consumer is taking financial strain amid the rising cost of living. As such, trading in retail centres has become more volatile,” suggests Mayers.

Experience is key

With a general lack of data available to property investors in South Africa, Wooler explains that much of this ability resides in an investor's experience and their track record. “Those that boast local knowledge and on-the-ground experience can overlay their honed intuition and intellectual property with other data sources to augment the decision-making process and uncover the opportunities that exist within a challenging market environment.”

In a volatile economic environment, it is essential for property investors to have access to experience, knowledge and expertise in the investment domain and the built environment so that they can understand the real value proposition of a property.

“Those that boast local knowledge and on-the-ground experience can overlay their honed intuition and intellectual property with other data sources to augment the decision-making process and uncover the opportunities that exist within a challenging market environment."

“As a property fund, we use a qualitative and quantitative lens to determine the viability of a property investment. This enables us to make informed 'micro' decisions to rate a property's potential for growth and returns by taking into account the sector-and location specific nuances within the context of a challenging macroeconomic environment,” explains Wooler.

“By making these 'micro' decisions, we focus on the fundamental attributes of individual assets and rate them accordingly, rather than paint all commercial properties in a specific sector with the same 'macro' brush.

“You need to understand the purpose of a property from a sector-specific and location perspective,” continues Mayers. “The right size and right position, for example, are key factors that influence your ability to secure long-term occupancy, which creates a more favourable risk profile for the investment.”

Attracting tenants from more resilient sectors such as finance and technology can further insulate investors from potential losses in tougher economic climates.

“However, to achieve this, investors must have a distinctive offering in the right position. It's no longer purely about price competition. This approach to specialised property investing, rather than a niche strategy, ensures we remain diversified across the property spectrum and has helped us to construct a portfolio that offers stock resilience, tenant reliability and a safety net of defensive properties that insulate the fund against depressed economic conditions,” adds Mayers. 

“Based on our experience and our continued success in the market, we believe this approach offers the ideal mix of factors to ride out the current market volatility. It also ensures that we're ideally positioned to catch the market rebound when market dynamics finally turn,” concludes Wooler.