The role of South African property in balanced portfolios

Abstract

The overriding objective of this paper is to establish the features that South African property brings to a balanced portfolio – and importantly to give insight into a strategic investment weight for this asset class. We acknowledge that listed and unlisted property are potentially two different asset classes and we conduct analysis on both listed and unlisted property. Using a mean-variance approach we find that listed property elevates the efficient frontier across the entire spectrum of risks having allocation weights in excess of 20% across typical risk mandates. Our non-parametric optimisation approach yields an optimal allocation to listed property of 23%, significantly higher than found in local pension funds. Using a non-parametric approach for tactical allocation considerations in differing economic regimes, we find there is indeed scope for tactical asset allocation to the listed property asset class. Considering the role of unlisted property separately in a balanced portfolio setting we find that unlisted property plays a diversification role in low-risk portfolios. However we find its role in optimal portfolios is less clear as it tends to be substituted by listed property.