The JSE is contemplating an expansion of its all property index after criticism of the methodology from several portfolio managers in the property sector.
Spear, Octodec, and Dipula do not meet the index’s criteria due to liquidity issues or being too small, meaning fund managers are not required to invest in or focus on these stocks. However, if these companies are added to the index, fund managers would need to track them and potentially take positions in them.
According to the market consultation published by the JSE, the proposed methodology suggests that listed property companies from the JSE fledgling index that meet liquidity requirements would also be eligible for inclusion in the all-property index.
“Under the new proposal, any company that is listed on the main board, belongs to the all share index or fledgling index and meets the liquidity requirement, will automatically be included in the all property index,” the statement said.
Nedbank senior property analyst Ridwaan Loonat said liquidity was an important factor.
“A key concern for investors is liquidity, so making this decision with this criteria in mind is positive. This should be positive for the counters that are included as index trackers or funds using the all property index benchmark would need to invest in these counters or at least analyse their investment case. There is also the benefit of increased diversification and potential for value investing,” Loonat said.
As the number of companies in the all share index decreases and the dynamics of the listed property sector evolves, several property companies that could be considered suitable for a listed property mandate are not in the all property index.
In 2016 the JSE released a market consultation proposing the discontinuation of the SA listed property index and the capped property indices, with plans to replace them with three new property indices. These new indices include the all property index, the tradable property index, and the SA real estate investment trust (Reit) index.
Over the years, the JSE has observed more market interest in the all property index compared with other indices. Due to the declining number of property companies in the all share index, the constituents in the property index have fallen from 33 in 2017 to 20 now.
Independent property analyst Keillen Ndlovu said that the move would be good for Spear, Dipula and Octodec.
“It helps them to get more attention, visibility from fund managers [and] investors and therefore should help improve their liquidity and ultimately share price performance over time. A stock that is not in the index or benchmark, is considered an off-benchmark position.”
The proposed methodology change will add four new constituents to the benchmark, contributing about 2.8% to its total weight.
For index users who rely on the all property index to define their investable universe, this change expands the index from 20 to 24 companies, a 20% increase. This expansion will offer greater flexibility in portfolio construction. Additionally, more listed property companies will gain access to index-tracking investors, potentially leading to broader benefits for the industry.
The proposed implementation of this change is scheduled for the first quarter of 2025, with effect from the March 2025 quarterly review.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.