Consolidation may spur listed property sector growth

South Africa’s listed property is expected to undergo consolidation in 2014, helping boosting the property sector’s share prices.

While some experts believe global listed property stocks will continue to perform well this year, local analysts are cautiously optimistic about South Africa’s listed property sector, which has run hard for a number of years but experienced volatility in 2013.

According to an investment outlook released on Tuesday by Franklin Templeton Real Asset Advisors, many global property markets could continue their growth trends in 2014 as recovering economies and limited construction deliveries of commercial properties are likely to support further rental growth.

This optimistic view comes after a difficult 2013 for South African listed property, which was affected by weakening and volatile bond yields. The South African listed property index recorded a total return of 8.39% last year. This was, unusually for recent years, far short of equities, which achieved a total return of 21.43% last year.

Franklin Templeton said trends in underlying property markets were positive for most US real estate investment trusts (Reits), primarily because of muted levels of commercial property construction and positive leasing demand for most property sectors.

Local listed property is expected to undergo consolidation in 2014. The bigger companies that result may push the sector to enjoy better returns than last year.

Grindrod Asset Management chief investment officer Ian Anderson said: "Bigger companies are acquiring smaller companies by issuing shares and not having to pay with debt, so we have earnings-enhancing transactions.

"These better earnings should boost listed property,"

The consolidation in the sector is expected to increase liquidity and bring more investors into the fray, according to Stanlib property portfolio manager Ndabe Mkhize.

"We have been waiting for a period of consolidation for a while. The market should open up to more foreign investors, which will help the sector to grow," he said.

Mr Mkhize also said the rand’s weakness against the dollar should help listed property due to the rand-hedging qualities of listed counters such as Redefine International and Investec Australia.

"Bond yields should soften a bit with the rand," he said. "I believe property can still outperform other investments as this happens."

Some analysts were more cautious about listed property’s prospects for this year.

"I do believe 2014 will be tough for the sector as bond yields will continue to have a significant impact on capital returns," Meago Asset Managers director Jay Padayatchi said.

"The pace of US Federal Reserve tapering (of its bond-buying programme) will most likely have the biggest impact on these yields and consequently on total returns for the listed property sector." He said some analysts may argue that the Fed’s gradual withdrawal of stimulus was already factored in and it was now only the pace of that tapering that would have an effect. The consensus was that the Fed’s bond-buying would be cut by $10bn at each of its policy-setting meetings this year, Mr Padayatchi said.

However, he agreed consolidation would help boost the property sector’s share prices. "Consolidation is very likely this year, with several property funds finding value in some of the smaller listed property stocks as fairly priced portfolios in the physical property space is hard to come by. This corporate action will drive the pricing of the targeted stocks," he said.

Listed property did manage to catch up some ground on equities last month, with a report released by Catalyst Fund Managers on Tuesday found the South African listed property index recorded a total return of 1% in December.