Abstract
M.Comm.
Just as a portfolio of shares needs to be managed constantly to yield the best return, a
portfolio of property investments also needs to be managed on a continuous basis for the
same reason. Until recently, most institutional property investors didn't have this
approach. Properties were managed as assets, and not as investments. One reason for
this was that until recently investors could not invest outside South Africa, which caused
institutional investors to invest relatively large percentages of their total assets in fixed
properties. Investors were caught off guard by changes in the market, and as a result they
have properties in their portfolios that are no longer performing well as investments.
Institutional investors are now trying to reduce their exposure to properties.
The objective of the study was to determine the factors that a property portfolio manager
must consider to maximize the return of the portfolio at an acceptable risk. From these
factors a questionnaire was developed to evaluate an individual building. The
questionnaire was linked to a decision tree by means of a points system. The decision tree
can be used by the portfolio manager as a qualitative decision making tool to enhance the
property portfolio. According to the points scored, a general classification is given to the
building (A-grade to E-grade), as well as on the location, technical aspects, profitability,
and potential of the property. There are five possible outcomes to the decision tree:
keep the property in the portfolio;
keep the property in the portfolio, but do the necessary upgrading;
keep the property in the portfolio, do the upgrading, but sell within five years;
sell the property as soon as possible; and
demolish the existing building, and redevelop the property.
The most important criterion for enhancing the portfolio, is the location of the specific
property. If the location of the property is classified as "A-grade", the property will be
kept in the portfolio, except when the technical classification of the property is "E-grade",
in which case the building is demolished, and the property redeveloped. If the
location of the property is classified as "B-grade", the property will be kept and upgraded
if the technical classification is not lower than "B-grade". If the location of the property is
classified as "B-grade", and the technical classification is "C-grade", the portfolio
manager should look at the profitability and potential of the building. If the profitability
and potential of the of the property is classified as "C-grade" or better, the property
should be upgraded, and sold within five years. If the location of the property is
classified as "C-grade" or lower, the property should be sold as soon as possible.
The portfolio manager should bear in mind that the decision tree does not take economic
conditions (for example supply and demand in the property market) and the investor's
portfolio enhancement strategy (for example to reduce the portfolio's exposure to a
certain type of property), into account. However, the decision tree can be applied to give
the portfolio manager an indication whether a specific property should be kept or sold.