SA Listed Property Funds vs Offshore Property Funds

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.

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      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

Cyprus the perfect place for South Africans

With summer still in full swing in Cyprus, long sun-drenched days ease into warm lingering nights & Cyprus has been buzzing with events, festivals, live shows and everything outdoors to tempt the senses.


There are 49 Blue Flag beaches in Cyprus; and loads to offer sun-worshippers and water sport adrenalin-junkies alike. CLICK HERE for my list of the island's Top 10 beaches; then get out your calendar and plan your next holiday to ensure you spend a summer in Cyprus!

The good news is that the ZAR/EURO exchange rate is 9.44 today; and prime is 9.5% (last seen in 1979!). Your annual travel allowance (R750k) and the once off discretionary allowance (R4m) permit you to take funds offshore legally. It is the perfect time to look at property in Cyprus to compliment your offshore asset base and secure your permanent residency. CLICK HERE to see historical graphs on the exchange & prime rates. MAIL ME for more info on the permanent residency and citizenship.

And now that we're shrugging off the last icicles from winter, my free-entry information seminars have resumed. See the article below " Diary items for Sept/Oct" contact me to find out when & where they are taking place.

Liberty International Raises GDB 280.5 Million

LIBERTY INTERNATIONAL PLC
(Registration number UK3685527)

Liberty International PLC ("Liberty International" or the "Company") announces that it has raised GBP280.5 million before commissions and expenses from the Placing completed today of 56,100,000 new ordinary shares at a price of 500 pence per share (the "Placing Price"). The Placing represents in aggregate 9.9 per cent of the issued share capital of Liberty International prior to the Placing. Merrill Lynch International ("Merrill Lynch") acted as sole bookrunner in relation to the Placing.

International Property Funds

In today's talk money show, we continued the discussion for the month of August about property investments and issues. Today we briefly touched on investing in listed property offshore funds.

This is of particular interest to investors who have cash offshore as these investments are not earning much interest.

The two offshore property funds I like are the Marriott and Stanlib International Property Funds, both offered through local offices in South Africa and both regulated by the FSB. listed unit trusts nationaly and internationally. Both funds are liquid and units can be sold within 48 hours.

The collapse of global listed property came to an end in March 2009 after a collapse of over 70% in US $. This is the biggest collapse in history in listed property shares in developed markets. Since then this sector has recovered somewhat at almost 40% in US Dollars and offers real value to long term investors wanting a better return than sitting on cash in Sterling, Euro's or US Dollars.

The Stanlib International Property fund has returned over 40% this past quarter and is still 60% behind the highs of March 2007. The fund still offers major value to investors. You can invest in US $ making use of your off shore allowance or you can invest in local currency ZAR using a Rand Denomination Fund.

If you are interested in obtaining further information email or call me...