BUSINESS DAY TV: Bourse proposes shake-up of property indices make-up
Mark Randall is manager of indices and valuations at the JSE.
BUSINESS DAY TV: The JSE is looking to rejig the way local property indices are constructed, largely following concerns raised around their current composition. Mark Randall, manager of indices and valuations at the JSE, joins us now on News Leader with more of the detail.
Mark … what have the concerns been around the way local listed property indices are put together?
MARK RANDALL: We have a number of listed property indices but I guess the key one that people would really be interested in is the SAPI, which is our South African Property Index. Now there are a number of pretty technical issues to SAPI but the real issue is one about identity. When we talk about South African property that means different things to different people. And what we’ve discovered is that the more people we talk to, the more we understand that people have a different view of what South African property should be and it doesn’t always align with the way we’ve designed our index.
BDTV: And because you’re looking at the index currently hosting international property counters for example, right?
MR: Absolutely, and the way that we’ve defined South African is to say any property company where the JSE is your primary regulator. In other words you have a primary listing on the JSE so any company that has a primary listing in London, for example, and a secondary listing on the JSE would not be included. But what we don’t do is we don’t ask any questions such as "where is your management team?" or "where is the property owned?", so you could be a JSE-listed property company and not own a single piece of property in SA.
BDTV: Okay, so what is the solution — simply divvying up the two?
MR: I wish it were that easy. Interestingly enough, when we started this journey in 2015 with a tentative market consultation, and the more people we spoke to the more we realised that there are so many different people using this index for such a range of different reasons, that it has really got to the point where there isn’t a "one size fits all" answer anymore. And I guess that speaks a bit to a maturity of the market. There are more than 66 listed property instruments on the JSE now, more than R750bn worth of market cap available to invest, so this really is a big and growing market and we’ve probably got to the point where we realised that maybe one index isn’t enough anymore.
BDTV: So what are you proposing … you’re proposing three indices here? Let’s take a look at the first because this is one that really targets the South African Reit space, right?
MR: Yes, you’re spot on. The real estate investment trust (Reit) structure is a global paradigm and it’s something that we’ve introduced fairly recently in SA and we’ve seen a lot of our local property companies move over to the structure. So the first index, as you say, is a South African Reit index, and the idea there is to take any All Share company that is classified as a South African Reit and put that into an index and that gives us about 16 instruments give or take, and those will really be that index strictly for South African focus.
BDTV: What’s interesting though is that it’s not only foreign Reits that are excluded here but property developers too, so why is that distinction being made?
MR: There are a few characteristics of a Reit, there is a minimum size for example, but every Reit has to pay out a minimum percentage of their earnings, they have to own income-earning property, so it’s a neat bundle for an investor who is looking for property but in the high dividend yield income sense. So it’s a nice tool for us to group those properties together.
BDTV: The second that we’re looking at is an All Property Index, so is that SA plus your foreign companies then?
MR: Yes, you’re correct — it’s really for the investor who says, I don’t care where the property is, I don’t care where the management company is, give me something that measures all the property that I can trade in rands on the JSE and that’s what this is designed for. So it’s a broad property index, we end up with just over 30 companies in there and what we’re saying is, if you are a property company, if we can buy your shares in rands, I don’t care where you’re based, I don’t care if you’re a Reit or an income or foreign or whatever that may be, if I can buy in rands and you’re on the All Share you’re in my benchmark.
BDTV: Okay, the third has a focus on liquidity so why have you opted to go down this route, because as you’ve highlighted, this is a sector that has harnessed a whole lot of investor attention as well as activity?
MR: That’s right, and this comes down to how people are using our indices. There is a certain subset of user for whom liquidity is critical and these are your ETF issuers, these are unit trust people who are tracking the index passively and particularly derivative traders. Our current SAPI meets both the benchmark need as well as the listed product need so the idea that the All Property Index would meet the benchmark needs for performance fees and benchmarks and mandate definitions, but the new tradeable property index is really there for someone who wants to list a fund or trade some kind of product.
BDTV: Are you surprised at the kind of traction that has been gained when it comes to interest in the property sector and the extent of the range of investors who are now delving into this space?
MR: Sometimes it’s easy to say that property is just another entity listed on the main board and it’s so different from any other equity, but the reality is that people do see property as a separate asset class. So it is important when you realise the importance to say hang on a second, this is not just another equity, this is a real class of asset that people look at differently, they allocate differently, there are specialist managers out there, so it really is a segment of the market that continues to grow.
BDTV: At this stage of the game these three indices are being put forward as a proposal or recommendation. What response have you received for the proposal?
MR: The proposal is hot off the press and we’ve released it before the Christmas season so we aren’t expecting to get any response soon, expecting people to go and think about this. The deadline for comments is February 10 so we will be engaging with all of our clients and users during January and February and hopefully get some consensus after that.
BDTV: Over and above everything you’ve mentioned you’ve also decided to introduce a cap so that no one counter could make up more than a certain percentage of the index. Are you expecting that to trigger much debate?
MR: This is one that nobody would agree on. First of all, nobody would agree whether we should have a cap or not and, second of all, at what level. If you look at our current SAPI index, the weight of Growthpoint is probably the biggest one in there, sitting at about 19% at the moment. Historically that’s gone over 25% so it does get high. If you’re using that as a benchmark or as a passive fund people do get worried about concentration when you get to 20% weight, and a cap is probably one of the cleanest ways to stop that. So it does future boost your index, particularly from that kind of concentration risk. What level to peg it at, I think if I got 10 analysts in here we’d get 10 different answers. Historically we’ve tended to cap our indices at either 10% or 15% so we’d probably gone on a similar road but this is really somewhere where we’d like the market to guide us in terms of what they need.
BDTV: Exciting times ahead....