Portfolio Diversification....Yes or No?
Should you diversify your portfolio? I think this could be one of the hardest questions a property investor has to ask themselves. The answer isn't simple either. In the 14 + years of my career in Commercial Property broking, I've seen what i call the "Cycle" of good times to bad times on several occasions. Through these times, certain markets show resilience whilst other markets show a withdrawal of demand and subsequently, value. So, to answer the question of Portfolio Diversification, the next question to ask yourself is how averse are you to risk?
If you are risk averse, then in my opinion, specialize in one aspect of the market that you can understand and that has had its resilience tested time and again. A good example is the Industrial market which has shown, area dependent, to be stable through the good and the bad times. The yields are reasonable and the annual rental increases are stable though rental adjustments to a market related rental are expected every 3 to 5 years.
The Commercial/Office market is a difficult space to play in. With various aspects relating to the demand and therefor resistance to negative growth such as parking, area etc, you really need to know what you are doing in order to play this market well. For the smaller investor, playing in the small sectional office space field of 50sqm to 500sqm, returns can be expected to be low with market prices in the CBD hitting all time highs with rentals not showing sufficient growth. However, The fact that there are numerous new projects on the go for Office development in the CBD is a good thing for investors. It will create a short to mid-term over supply of office space in the CBD but given the cost of development nowadays, the rentals these properties require in order to be viable means that it could have a knock on effect so, those players who got into the market 5 or more years ago could reap the rewards of an unexpected boost in rental demand.
Retail. Ah, yes...the Retail market. We see the demand for Retail come in waves. Right now, the demand for retail is high again with medium to large Funds and high wealth individuals looking for retail acquisition opportunities. Despite the fact that many would agree that the retail market is over-saturated, the demand for retail sites is still high with the gold prize being opportunities in the lower LSM areas and townships as the buying power of such a densely packed region is significant and therefor creates a demand for retail space meaning your investment is fairly secure with reasonably good yields. You will note that i have not mentioned yields and where they sit as this varies significantly depending on where in the "cycle" we are sitting and demand vs supply. Again, the retail market is a viable market if you know what you are doing and specialize in this field, having built relationships with many of the major retailers which is key to your success.
So...back to the question. Too Diversify or Not to. In my opinion, if you are a large property fund with investments worth a couple of Billion, it pays to diversify in order to weather the "cycles" that we see, by my calculation, every 5 years or so where a high yielding portfolio like retail may take a slight dip one year whilst demand for Industrial or Commercial hits a peak. This means that you can work an average yielding portfolio to be stable over time. However, for the smaller investors and funds with anything from R5m to R3 Billion, it may be better to focus and specialize in one field of the market so that you can learn and grow your portfolio to maximise your rate of return.
Article written by Wade Nel of Stealth Commercial Properties.