‘Overvalued’ listed property in SA losing its lustre

Some pundits believe South African listed property’s strong run over several years is set to be derailed by revaluations and a slow-growing economy.

OME pundits believe South African listed property’s strong run over several years is set to be derailed by revaluations and a slow-growing economy.

Dries du Toit, a former chief investment officer at Sanlam Investment Management, said at the IPD MSCI South African Property Conference in Cape Town last week that listed property was slightly overvalued and would be rerated. Direct property was more likely to bring strong returns, especially unlisted residential property.

“We are looking for our Cinderella asset as opposed to uglysister investments. Listed property proved to be that for the past few years but there are forces which will weaken its return going forward,” he said.

Over the past decade, South African listed property had achieved a total return of 21.5% but it would not manage even half that over the next five years, Mr du Toit said. “I think the sector is slightly overvalued. We are going to see some rerating and it returning 8% to 10% over the next five years. On the other hand, I can see direct property managing 14% over the same period.”

But some listed property managers have said that while parts of the sector are too expensive, there are property funds that are undervalued, and that investors should be more active when it comes to buying listed property stocks as opposed to just buying the FTSE/JSE Sapy (South African Property) index as a passive investing strategy.

Texton Property Fund CEO Angelique de Rauville said at the IPD conference that many asset managers, especially those who had recently begun investing in property stocks, were suddenly becoming hesitant to invest further, thinking the whole sector was too expensive.

“Many stocks trade at large premiums to net asset value (NAV) but some are trading at discounts to NAV,” she said.

“Beyond that there are a number of funds that have strong growth potential, especially those finding opportunities abroad like Texton.”

Grindrod Asset Management’s chief investment officer, Ian Anderson, said that overall even if investors found listed property funds that offered attractive returns, they would still fall short of the stellar performances of the past five years. “We won’t see 25% or 35% returns. We may get some double-digit returns on certain stocks, but ultimately we are entering a low-return environment for all asset classes.

“The key is to invest carefully and at as low a cost as possible,” he said.