The JSE embarked on a process to improve existing property indices two years ago as the general view was that the benchmark Sapy no longer accurately represented the local property sector. The Sapy was launched in 2003 at a time when property still formed a small portion of the JSE's overall market cap. Back then, the sector was highly illiquid and not widely covered by investment analysts.
However, 14 years on the market cap of the sector has ballooned to nearly R500bn and property is recognised as a major asset class alongside general equities, bonds and cash. The rush of new property listings in recent years has pushed the JSE's bevy of property counters to close to 50. Yet the Sapy only includes the JSE's 20 largest property counters by market cap.
The geographical spread of property stocks has also changed dramatically with at least 20 of the JSE's property counters today being pure offshore plays. That's a far cry from 2003 when the JSE had only one offshore property listing - Liberty International (now Intu Properties). However, most of the JSE's offshore listings are excluded from the Sapy as only those with a primary listing are included.
The JSE's proposal released at the end of 2016 suggests the Sapy is replaced by three new indices - the SA Reit Index; the Tradable Property Index; and the All Property Index. The SA Reit index will include only JSE listed companies classified as South African-based real estate investment trusts, or Reits. This index would be similar to the current Sapy but exclude all dual listed offshore companies, such as New Europe Property Investments, Rockcastle, MAS Real Estate and Stenprop, and developers such as Attacq.
The Tradable Property Index would likely include the 13 most liquid property companies on the JSE regardless of where the primary listing is. The third proposed index, the All Property Index (Alpi), will include all property companies in the All Share Index (currently 30), including both foreign and local property companies, Reits and developers. The foreign companies will be included based on SWIX weightings.
Mark Randall, manager of indices and valuations at the JSE, said the JSE has now concluded its process of market consultation. "Once we have considered the feedback, we will incorporate that into our changes and announce the final implementation date."
However, industry players believe the new indices are likely to be introduced as early as mid-year.
Mohamed Kalla, director of Sesfikile Capital, says the JSE has taken positive steps to realign the Sapy and make the index more relevant. "We look forward to applying our skillsset towards generating returns across a wider universe."
Kalla says initial changes in the Sapy will likely trigger material changes across many fund managers' portfolios as their benchmarks may be adjusted, which could create short-term trading opportunities. "However, the real opportunity is more strategic and long term in nature as the greater liquidity and more efficient stock allocation should enhance the quality of investment portfolios in light of risk and return."
He believes out of the three indices proposed the Alpi is the most appropriate to replace the Sapy. "The SA Reit Index would be an attractive yielding index with a strong South African bias but we feel it would be limited and quite homogeneous with little opportunity for adequate diversification. It would also have higher concentration risk than the current Sapy."
Similarly, Kalla says while the Tradable Property Index would be appropriate for tracker funds, it's also limiting with regards to choice and could push companies to chase size and liquidity at the expense of earnings.
"The Alpi should be the primary index that replaces the Sapy as it incorporates more choice and simultaneously lowers concentration risk."
Source: Business Day
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