Property Investors set to earn better returns offshore

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Jay Padayatchi, director at Meago Asset Managers, believes the JSE’s offshore property players are now more attractive than local counters given the potential for further rand weakness. Jay Padayatchi, director at Meago Asset Managers, believes the JSE’s offshore property players are now more attractive than local counters given the potential for further rand weakness.

The best returns are likely to come from JSE’s offshore listed property which is now more attractive than local counters given the potential for further rand weakness, according to the latest review of the sector.

The wild swings in listed property prices since mid-May are prompting investors to reassess their exposure to the sector. After strong gains of 35% in 2012, it seemed that the bull run in property share prices was set to continue well into 2013.

But the party came to an abrupt end on May 20, when softer bond yields, the weak rand and a number of large property equity raisings finally took their toll. The index fell by nearly 20% in the five weeks to June 20.

Property stocks have since been up and down. By Tuesday the index had recovered around 7% of its losses. That places the sector on an average forward yield of around 7%, which analysts say still looks relatively expensive compared with bonds, where income investors can now get yields exceeding 7%.

Some institutional investors, most notably Sanlam, have become reluctant to pour more money into property stocks. “We currently hold on average about 2% in listed property across our multi-asset balanced funds and we are in no rush to increase our exposure,” says Rafiq Taylor, a portfolio manager at Sanlam Multi Manager International.

Taylor says the excess volatility in the listed property index over the past two months has raised a red flag for investors. Sanlam plans to sit tight until the fundamentals driving the market can be assessed “more soberly”.

Old Mutual’s listed property head Evan Robins has a similar view. “Highly riskaverse investors should be cautious of listed property. Prices can be volatile and the sector is expensive on a short-term view.”

Robins says the correction in property prices over the past 10 weeks was surprisingly mild. “If property had reacted fully in line with bonds, the sector would have fallen an additional 10%.”

However, Robins believes that listed property is still a good bet for long-term, income-seeking investors looking for a growing cash flow.

Investec Property Equity Fund portfolio manager Neil Stuart-Findlay agrees. Despite short-term volatility in property share prices, he still expects total returns (income and capital growth) of 10%-12% over the next 12 months and income (distribution) growth of 7,5%.

“The ability of the sector to grow income over time on the back of fixed annual lease escalations is a key factor that differentiates listed property from cash and bonds. The income generated by cash and bonds is primarily fixed so they currently provide little or no protection against inflation.’’

However, analysts agree that property investors need to become far more circumspect in their stock selection, as the performance gap among the sector’s 30odd counters is likely to widen further over the next 12-24 months.

For the year to July 19, the total return differential between the best and worst performing property stock is already close to 60% — Hospitality Properties (B units) at 60,7% versus Annuity Properties at 1,7% (see table).

The key question is which stocks offer the best returns over the next few years. Jay Padayatchi, director at Meago Asset Managers, believes the JSE’s offshore property players are now more attractive than local counters given the potential for further rand weakness. Romanian focused New Europe Property Investments (Nepi) is the stand-out.

“The ability to raise capital among SA investors who are keen to expand their exposure to a foreign currency income stream has placed Nepi in a sweet spot, enabling management to clinch property deals, unlike many of its European competitors who don’t have easy access to equity funding.”

Padayatchi says the counter’s market cap has surged to above R12bn, up from less than R3bn two years ago, which has improved liquidity constraints.

However, Padayatchi still sees selected value in local stocks, especially among the newer listings. These include the likes of Delta Property Fund, which focuses on the governmenttenanted office space, and retail-focused Rebosis Properties Both counters are trading at yields well above 8% compared to the sector’s 7%.

Among the larger, more established counters, Padayatchi likes Capital Property Fund Though there is some concern around lingering vacancies in Capital’s office portfolio, the counter boasts the best quality industrial property portfolio in the sector.

Macquarie First South Securities property analyst Leon Allison also ranks Nepi as his top pick. He says though it may seem that the good news is already priced in, the stock is not yet expensive given its exceptional growth prospects, both within the retail and office markets of Romania as well as in neighbouring Hungary and Slovakia, where management is planning an entry.

Allison forecasts a total return of 30% over the next 12 months. Nepi is currently trading at a forward yield of just over 5% and earns its income in euros. Dividends to SA shareholders are paid in rand. Local property stocks that Allison believes will outperform the market over the next 12-24 months are Capital and Hyprop Investments

Ian Anderson, chief investment officer at Grindrod Asset Management, believes the best value currently is to be found in smaller counters which are overlooked by large SA institutional and foreign investors.

He says while blue chip heavyweights like Resilient Property Income Fund, Growthpoint Properties and Hyprop are now trading at yields of 4,3%-5%, a number of smaller stocks offer nearly double that at 8%-9%, with distribution growth prospects in excess of 10%/year over the next three years.

Value buys singled out by Anderson are the B units of both Ascension Properties (also exposed to the government-tenanted space) and retail-focused Synergy Income Fund, which invests primarily in lower income areas. Office-focused Vunani Property Investment Fund and Delta Property Fund also look attractive.

“These stocks may not offer the apparent quality of the property portfolios that you get when you buy Hyprop or Growthpoint, but they are attractively priced relative to the medium-term cash flow they offer.”

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Listed Property / REITs  |  Jay Padayatchi  |  Meago Asset Managers  |  Offshore Property Investment