Listed Property Sector Vulnerable, But Longer Term Prospects Good

Listed Property Sector is currently vulnerable to further weakness in global and local bond markets, says Ian Anderson, chief investment officer at Grindrod Asset Management, however, the longer-term prospects for the sector continue to look good.

South Africa’s listed property sector declined by 3.4% during the week that ended on 5 July 2013 on the back of higher global bond yields, a weaker Rand and the unwind of June’s quarter-end window dressing.

According to Ian Anderson, chief investment officer at Grindrod Asset Management, the larger, more liquid listed property companies that were pushed higher in the final week of June were the hardest hit, with Hyprop Investments and Redefine Properties both declining 6.2% last week. Over the same period, the South African equity market declined by 1.0%, while the South African bond market declined by 0.9%.

Vividend Income Fund announced the acquisition of nine properties for a purchase consideration of R632.9 million. The average purchase yield attributable to linked unitholders, assuming a 40% loan to value, is 10.36%, which would make the transaction earnings accretive and highlights the opportunities that exist currently for smaller listed property companies to grow distributions through acquisitions.

Growthpoint Properties announced the acquisition of a further 26.3 million Growthpoint linked units by Growth Management Services and 12 million Growthpoint linked units by Miganu Investment Holdings for an aggregate purchase consideration of R824.2 million. Growthpoint intends to utilise the linked units purchased to structure a new staff share incentive scheme to incentivise and retain Growthpoint staff over the longer term, as well as pursue new transactions to further Growthpoint's overall empowerment credentials and BEE rating.

New Europe Property Investments (NEPI) issued a trading statement notifying shareholders that the distribution per share for the six months ended 30 June 2013 will be approximately 15% higher than for the comparable period in 2012. This should not have come as news to shareholders. NEPI has repeatedly let shareholders know that dividends are likely to grow by 15% a year in the medium term, given the investment opportunities in Romania and the company’s ability to realise significant value from the properties it acquires.

Vunani Property Investment Fund announced the terms of a rights offer to raise R455 million. In terms of the rights offer, unitholders will be offered linked units at a subscription price of R9.50 in the ratio of 39.70776 rights units for every 100 linked units held. The proceeds of the rights offer will be used to fund the acquisition of properties in Greenstone Hill Office Park as well as to settle floating debt.

A number of companies announced that their applications to the JSE Limited for Real Estate Investment Trust (REIT) status had been approved, including Hospitality Property Fund, Fortress Income Fund, Dipula Income Fund, Redefine Properties, SA Corporate Real Estate Fund, Fairvest Property Holdings and Vunani Property Investment Fund.

As a result of last week’s price weakness, the South African listed property sector is now trading on a forward yield of 6.9%, which is approximately 90 basis points above the yield on a 10 year government bond. This leaves the sector vulnerable to further weakness in global and local bond markets and is likely to result in significant price volatility in the short term. The longer-term prospects for the sector continue to look good, given an initial income yield in excess of the upper end of the South African Reserve Bank’s targeted inflation range, as well as growth in income in excess of inflation over the long term.