Investment opportunity knocks for listed property sector

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Since May last year, listed property has been on a roller-coaster ride in South Africa. The sector tends to move closely in line with bonds, as bonds and listed property are both income-generating investments. Since May last year, listed property has been on a roller-coaster ride in South Africa. The sector tends to move closely in line with bonds, as bonds and listed property are both income-generating investments.

The fall in property stock prices since the US first raised the possibility of cutting down on its quantitative easing programme in the middle of last year has created a buying opportunity for investors.

Analysts, however, are divided over whether the stocks will offer only reliable income returns or impressive capital growth too.

Forecasts for the total return for South African listed property for the next five years lie between 8% and 15%. This is because the sector has become more volatile.

Property stock returns are composed of share price movements, or capital growth, and income returns, measured as a yield.

Since May last year, listed property has been on a roller-coaster ride in South Africa. The sector tends to move closely in line with bonds, as bonds and listed property are both income-generating investments.

Global bond yields jumped when the then chairman of the US Federal Reserve, Ben Bernanke, said in May last year that the Fed was considering reducing its monthly bond buying, or quantitative easing, programme. A rise in yields meant there was a fall in the prices of bonds, and hence of property stocks.

Since last May, the JSE’s listed property sector index has fallen 21%.

This is not the first time in recent memory that the index has taken a battering. It fell 37% in 2008, during the great recession. In 2006, it was down 26%.

Stanlib property funds head Keillen Ndlovu’s forecasts do not bode especially well for the sector. His bullish forecast for 2014’s total return is 8%, his base forecast is 5%, and bear case is 2.1%. His four-year forecasts are bullish: 8%, base case 6.9% and bear case 5.8%.

Grindrod Asset Management’s Ian Anderson is more optimistic. "Listed property stocks have strong potential for capital growth. I can see them getting to a 15% return at least each year over the next three years," he says.

This is given income growth forecasts of between 7% and 9% a year. "Currently, you can buy listed property on a forward yield of around 8%. That is better than any other income-generating asset readily available," he says. While this year may prove volatile for the sector, listed property has an impressive record for investors. Mr Ndlovu says SA’s listed property sector as an asset class has achieved a 771% return over the past 10 years, beating equities, which returned 569%, a 207% return from cash, and bonds, which embarrassed with a mere 233% in comparison.

Mr Ndlovu was looking at data measuring asset class performance from the end of January this year, backwards.

Last year, property mustered an 8.4% return, being soundly beaten by equities, which returned 21.4%.

Listed property had grown 36% in 2012. Cash managed a return of only 5.2% last year and bonds 0.7%.

Consumer price data for last month showed consumer price inflation to be 5.8% year on year, showing property has beaten inflation by a meagre 2.6 percentage points.

Various economists are forecasting that consumer price inflation will exceed the South African Reserve Bank’s 3%-6% inflation target range when this month’s data are collated, or if not then, when the data for March are collated.

Year to date, listed property has sustained a 4.9% loss, while equities have achieved a 1.8% return, cash 0.7% and bonds have lost 1.51%.

Mr Ndlovu says listed property should be buoyed by a rand that has eventually strengthened this year following a slump.

Strong demand for retail space in bigger shopping centres, and merger and acquisition activity should also improve the sector’s performance. Since late last year, the sector has been experiencing a merger frenzy.

Just this week, Arrowhead Properties said it would buy the management company of Vividend Income Fund. A triple merger between broad-based black economic empowerment funds Ascension Properties, Rebosis Property Fund and Delta Property Fund is also in the works, among other deals. 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 says.

Risks to the downside included low economic growth, increasing vacancies in B-grade offices, and higher operating costs amid a struggling economy. These operating costs include rates and taxes, toll costs and electricity costs.

South Africa’s real annual gross domestic product last year increased 1.9% compared with 2.5% in 2012. South Africa is an emerging market and needs to grow at substantially higher rates to make dents in its 24% unemployment rate.

By contrast, the UK, a developed economy, grew by 1.9% last year — its strongest rate since 2007.

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Listed Property / REITs  |  Keillen Ndlovu  |  Ian Anderson  |  Ndabe Mkhize