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

Investors getting back into listed property

The ACI says the industry's 23 real estate funds saw a net inflow of R737m in third quarter 2008, bringing total assets for this sector to R17,48bn. Those funds are all invested in JSE-listed property stocks mainly exposed to SA's commercial property market.
Property investments now represent 2,7% of the collective investment industry's total assets of R647bn. The positive flow of funds into real estate funds in the third quarter follows a net outflow of R1,049bn and R142m respectively in the second and first quarters of this year.
Keillen Ndlovu, co-head of Stanlib's property franchise, says the rush back into property from July was prompted mainly by SA's improved inflation outlook and a belief that the interest rate cycle has peaked. Ndlovu says it also appears global market volatility is causing investors to chase vehicles with good earnings visibility. In that regard listed property has an advantage over general equities, as the rental income earned by property funds is more stable and predictable than the earnings of general equity companies.
Says Ndlovu: "In general equities, if business slows down, earnings immediately suffer. Whereas the earnings of property companies are defensive, backed by rental leases signed for three to four years on average. In addition, rental leases escalate at 8% to 10%/year, creating a good inflation hedge."
Ndlovu says it's interesting there's been virtually no correlation between equities and listed property over the past year, creating a compelling case for having listed property in a balanced portfolio. The latter is one reason why Ndlovu believes the real estate sector is starting to see increased interest from pension fund managers that previously had little or no exposure to listed property.
Listed property also looks attractive compared to other income paying investments, such as bonds and cash. The sector is currently trading at a forward yield of just under 11%, a level last seen in early 2005. Ndlovu says that's not too far off the 12% levels investors can earn on cash and higher than bond yields of 9,4%.
Another key attraction is the income or distributions that property funds pay out to investors, grow on the back of the annual rental escalations paid by tenants in shopping centres, office blocks and factories. By contrast, the income earned on cash and bonds don't grow. Growth in income payouts by listed property funds is up an average 12% so far this year. The industry expects income growth to remain in the 10% to 12%/year band for the next two years.
Latest ACI figures show that over a one-year period real estate focused funds outperformed general equity funds, with the property sector delivering an average total return of -10,29% for the 12 months to end-September 2008. That compares to a total return of -16,87% for general equity funds. Those figures are based on lump sum investments.

Residential Property Crisis Looms...

Absa's housing "fire sale" of the year
Realestateweb reporter
06 October 2008 Article rating:-->
Homes, plush and modest, in special distressed sale auction in Pretoria; other banks to follow suit.
Big four bank Absa is to offload not far off 70 homes, ranging from plush to modest, in its biggest mass "distressed sale" auction of residential properties in Pretoria next week.
The Alliance Group recently launched a rapid auction programme for the bank, selling off properties en masse where owners can no longer meet their debt obligations.
The auctioneer announced on Monday it would be conducting its biggest ever rapid auction yet, on 16 October (Pretoria Country Club).
It revealed, too, that other banks have signed up for rapid auctions to get properties off their books.
The special auctions are being held regularly around the country, with about 200 homes being passed on to the auctioneer by Absa each month, said the auctioneer.
Rising interest rates and slowing economic growth have been putting financial pressure on home-owners across income groups while emigrating sellers have been adding stock to the market in large numbers.
Estate agents have struggled to sell properties this year, with FNB Home Loans reporting this week that the average time to sell a home has now stretched from about three-and-a-half months in the second quarter of the year to more than five months.
FNB said on Monday, when it released its quarterly barometer on the residential market, that investors have been increasingly returning properties to the market at break-even prices and for less than they paid.
The rapid auction programme "helps defaulting homeowners to sell their properties through a voluntary and non-compulsory sales channel whilst working closely with the banks and bondholders to minimise debt write-offs", said the auctioneer.
"Other banks have also signed up for the ‘Rapid Auction Programme' and the banks themselves are counselling their defaulting and distressed clients, with whom sales mandates will be signed directly," said Alliance's Gary Serebro.
There are a number of residential properties on offer, ranging from a magnificent five-bedroom home in Centurion, a four-bedroom home in Magalieskruin with a gym and jacuzzi, a three-bedroom villa in Pretoria North to a stunning 4-bedroom thatched home in Glen Austin, said Serebro.
Additional properties, he said, include: a two-bedroom home in Moreleta Park, and a number of vacant plots in Kosmos.
Absa told Realestateweb recently that professionals, like doctors and lawyers, are among those hardest hit.
Gavin Opperman, Absa Home Loans chief executive officer, said consumers were not going to doctors and dentists and were not paying their medical aids.
He cited the example of a property he handed over for auction after a medical professional who put down a deposit of R3m, plus costs, and was repaying the balance of R7m with a mortgage could no longer keep up with his debts.
The professional paid R10m about 18 months ago for his home and was struggling with home loan repayments of about R100 000/month. Particularly depressing is that the owner can expect to fetch 50 to 60% of that market value on auction.
This is not an isolated case, said Opperman. He added that Absa would assist individuals like this who contact the bank as soon as they spot they are heading into financial trouble.
"These people will bounce back. We'll restructure the debt and he will rent for a while," said Opperman referring to the medical professional who is about to see his dream home go under the hammer.
He said individuals in the affordable housing space were not as hard hit as the upper income earners. Neighbours and friends in lower income areas tend to help each other with debt repayments, unlike the top-end luxury housing market, he said.