SA listed property sector is the
best performing asset class year-to-date. It has delivered phenomenal 24.05%
total returns. Why?
Bond yields have been strong.
For example, the R208 yield (10-year
bond equivalent) has strengthened (capital values have increased) from 8% to 7%
year-to-date. Listed property has a high correlation to the bond market due to
its income generating ability. For example, over the last 12 months, the
correlation has been 83%. When bond yields fall, property values go up. It’s
the same as saying when interest rates fall, property prices go up.
2
There has been huge inflows into the sector
Both retail and institutional. Some
equity players who have been underweight property have been buyers as well. We
are hearing from our brokers that offshore players have been buying too.
So has listed property run hard?
· The run is justified given the strong
bond market. But on a relative rating basis (yield comparison), listed property
has run slightly ahead of bonds.
So what is the one-year outlook from
here?
· The sector is now trading at a forward
yield of 7.1% assuming our income growth forecast of 5.5%
· Here are our updated total return
(income + capital) scenarios. These are after adjusting for the fact that
listed property has run ahead of bonds on a relative basis.
·
BULL CASE - 14.7% total return assuming
10-year bond yields (R208) at 6.75%
·
BASE CASE – 7.5% total return assuming
10-year bond yields (R208) at 7.25%.
·
BEAR CASE – 1.2% total return assuming
10-year bond yields at (R208) at 7.75
Risks to the listed property return
outlook
Upside
· Lower inflation leading to lower
interest rate cuts to lower bond yields and higher property prices (bonds have
somewhat price this)
· Inclusion of SA bonds in the world
government bond index leading to huge offshore demand thus pushing yields
further down
· Corporate action – lower yielding
companies taking over higher yielding companies
Downside
·
Rising bond yields
·
Lower economic growth leading to rising
vacancies and a weaker rental market particularly in the office space
·
Rising operating costs (rates + taxes
and electricity). Most of these are passed over to tenants. However, they
limit landlords’ ability to bargain for higher rentals.
Local Property
·
SA Listed Property has delivered superb
total returns so far this year. We do not expect these kind of returns
over the next year.
·
The sector is trading at a forward yield
of 6.8%. Our base case total return expectations based on the 10-year
bond
yields at 7% are around 7% (i.e. basically income returns).
o This is a risk-adjusted number and still beats cash.
o The main risk for listed property is rising bond yields.
NB: The STANLIB Aggressive Income Fund (benchmark 33.3% property, 33,3%
bonds and 33.3% cash) for those investors who
o prefer a lower local property exposure or lower volatility
o would like to take profits from STANLIB Property Income Fund (local
property)
o prefer to leave the allocation of cash, bonds and property to a team of
specialists in the respective fields.
Offshore Property
· The offshore listed property
sector is trading at a forward yield of about 4% US$ (NB: all the
distributions are reinvested into the fund).
o This is comfortably above 10-year global bond yields (e.g. US 1.6% and
UK 1.7%, Germany 1.4%) and of course cash (which is yielding virtually
nothing).
·
Fundamentals (retail, office and
industrial rentals) are still fairly good especially in the US (over 50% of the
portfolio).
o Singapore and Hong Kong are cooling off a very high base however.
·
The offshore listed property sector is
trading at a premium to NAV of about 3% (SA listed property is trading at a
premium of about 30%...our physical property valuations are not as current as
our offshore counterparts however).
·
The offshore listed property sector has
run – it is not cheap and it is not expensive either.
o But one thing to point out is that offshore property delivered flat
returns in 2011 in USD (all the returns in 2011 (excess of 20%)) were driven by
the depreciation of the rand.
o The returns of about 20% (USD) so far this year are off a low 2011 base.
Offshore vs Local Property?
At the moment I prefer
offshore property to local property. Main reasons?
·
Superior gap in listed property yields
vs bonds and cash
·
Much lower premium to NAV
