Dip in SA Listed Property

The SA Listed Property Index has lost 14.1% month-to-date. This includes Friday’s 5.3% loss.

Source: INet-Bridge

The weakness was first driven by Growthpoint’s R2.5bn equity raise in the week prior to last week.   At the time, we thought the listed property market will normalise about a day or two later, after most listed property portfolio managers had raised enough cash (by selling other listed property stocks) to fund the deal.

Unfortunately, things got worse. Some market analysts expected an interest rate cut and that did not happen. The GDP numbers came out worse than expected. The trade deficit was bigger than market consensus.  Foreigners sold off our bonds. The rand weakened and bond yields moved up.

When bond yields move up, listed property prices fall. The opposite is true. In order words, the weakness in listed property prices has been driven by a weaker bond market.

Listed property prices have changed but the story hasn’t - the underlying physical property fundamentals remain unchanged. Our income growth outlook numbers remain unchanged. As we always say, income is stable however capital can be volatile.

As a result of the recent weakness in price, the one year forward yield (income) for the listed property sector has risen, from 6.1% earlier in the month, to just over 7.2% i.e. listed property yields have risen (prices fallen) in line with the bond yields (which have moved 100bps, from 6.1% to about 7.1%).

In summary the property fundamentals remain unchanged with a strong forward yield.  So your income is stable however capital can be volatile.

Stanlib Property Income Fund

Stanlib Property Income Fund 

Listed Property Sector

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

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.

Gold Glitters Again

I'm bullish on gold. I believe the credit crunch after shock will bring back the intrinsic value that gold offers. I expect gold to move over $1000 shortly.

Another tangible asset that has just turned the corner is SA Listed Property. I expect this asset class to gain a lot of ground between now up untill 2010.