Listed property sector down but it is certainly not out
Stronger rand may be supportive of bonds which will prop up property returns
Thabang Mokopanele
Published: 2011/02/02 06:36:58 AM
AFTER a whirlwind year in 2010 when it delivered strong returns to investors and beat other asset classes, SA’s listed property sector is starting this year on a low, losing 4,19% last month as it tracks bonds downward.
While the sector strongly outperformed other asset classes last year, the sector has not seen aggressive re-rating relative to bonds and it still trades at a discount to its historical peak rating.
While the sector might be down it is certainly not out because relatively lower inflation and a stronger rand are anticipated to be supportive of bond yields, providing support for property returns.
The 10-year bond yield has moved up 60 basis points, from 8% to 8,6%.
When bond yields move up, capital values decline. Listed property has a high correlation to the bond market because listed property and bonds are both income-generating assets.
For example, over the past five years the correlation has been about 75%.
Over the past year the correlation has been 83%.
Equities lost 2,15%, cash is up 0,49% and bonds are down 2,14% from the end of December until the end of last month.
Stanlib’s head of property funds, Keillen Ndlovu, says he is expecting income to grow by about 6% in the next 12 months, which gives a forward yield of 8,7%.
"This is ahead of cash 6,3% and bonds 8,6%. We expect that income growth of 6% will beat inflation," Mr Ndlovu says.
Giving advice to investors wanting to invest their money in listed property, Mr Ndlovu says "income should be the primary reason for investing in listed property.
"Capital tends to be volatile but it grows over time. I think it also helps investors to diversify away from cash, equities and bonds.
"Listed property is a hybrid of equities and bonds. It is a separate asset class."
Investment in listed property stocks should be relatively long term with Mr Ndlovu saying an investor should take a three-year view on listed property.
But, Meago portfolio manager Jay Padayatchi does not ascribe all of the listed property sector’s performance to bond yields, arguing that the sector, through its continued positive distribution growth of 7% last year, continues to demonstrate its defensive qualities.
"The sector, which also experienced strong inflows from institutional investors, is now largely regarded by them as a separate major asset class."
He says that there will be an improvement in property fundamentals as both local and global growth continues.
"The various property sub- sectors show different propensities for growth this year, with quality retail and industrial property likely to continue to outperform while the office sector is likely to trough this year before displaying moderate growth next year."
Leon Allison, research analyst at Macquarie First South Securities, says he does not expect any capital returns from existing levels, despite the sector’s likely 6%-7% growth this year.
"We believe that a de-rating (a rise in property yields) relative to the current bond yield would offset the impact of distribution growth, while several funds are likely to come to the market in the next six months with new equity issuance," Mr Allison says.
Capital director Mohamed Kalla says that he expects conditions in the direct or fixed property sector to remain tough this year although he does expect relief in some key indicators such as arrears, bad debts and vacancies towards the latter part of the year.
Mr Kalla says listed property’s risks are on the downside, and largely stem from the vulnerability of the bond market — a combination of a weaker rand and a spike in food prices could lead to higher inflation and weaker bonds.
Investec Asset Management portfolio manager Vuyani Bekwa says that the listed property sector is likely to face new challenges this year, because in the year to date the sector has come under pressure on the back of weakening bond yields. But this is a short-term concern.
"After the big rally we experienced last year, massive upside is likely to be limited this year.
Vacancies are anticipated to be at their peak and expected to start coming down over the next 12-24 months. This will add the tail winds to underpin strong distribution growth," Mr Bekwa says.
mokopanelet@bdfm.co.za
