Bond sell-off sparks drop in property index

FTSE/JSE South African listed property index has lost 9.48% of its value since the beginning of March.

THE FTSE/JSE South African listed property index (Sapy) has lost 9.48% of its value since the beginning of March, mainly because of the sell-off in bonds this year, given investors’ belief that the US will raise interest rates for the first time in nearly a decade this year.

Analysts nevertheless believe the sector will recover before the end of the year.

Bond yields have risen globally over the past few months, which has pushed down bond prices. The listed property sector has tended to move closely in line with bonds as both are incomegenerating investments.

“While 10-year bond yields have corrected significantly over the last few weeks, from sub 8% at the end of March to 8.4% currently, in anticipation of the US Fed (Federal Reserve) hiking rates sooner rather than later, recent US macro data have continued to signal a broadly improving US economy,” Meago Asset Managers director Jay Padayachi said on Monday.

“This, combined with a potential Greek default, has impacted emerging market bonds yields significantly, and hence listed property has followed suit. You would have to believe that a significant portion of these global macro risks has already been built into listed property yields ,” he said.

Strong earnings growth had nevertheless come out of listed property despite challenges to the asset class. “However, with the strong earnings growth that has come out of listed property and little concern about the underlying cash flows, the sector should recover. Besides, it is and always has been an asset class to invest in for the medium to long term given the strong defensive characteristics, which have proven to be resilient through the different economic cycles.”

The Old Mutual listed property manager of the MacroSolutions boutique, Evan Robins, said the dip in listed property prices was not overly surprising given that its performance was “abnormally strong” last year.

The Sapy achieved a 26.6% return, including dividends, last year, outpacing the JSE all share index, which only mustered 10.9% last year.

This year bigger listed property stocks such as Growthpoint Properties and Redefine Properties saw dips in their share prices. Growthpoint’s shares have lost 14.87% from a high of R30.02 on January 26. Redefine’s have fallen 19.87% from a high of R12.68 on April 16.

“The loss in total return since March was predominately because of the sell-off in bonds with the 10-year bond yield increased over 50 basis points over this period.

“This was due to global more than local interest rate pressures,” Mr Robins said.

Grindrod Asset Management’s chief investment officer, Ian Anderson, said a number of property funds were still attractive investments.

Some smaller stocks had forward yields of between 9% and 11% and were expected to grow distributions in excess of inflation over the next three years.

“These opportunities include Tower Property Fund with a yield of 9.3%, Texton Property Fund with a yield of 9.3%, Delta Property Fund, which is yielding 10.7% and Rebosis Property Fund with yield of 10%,” said Mr Anderson. “While investors should therefore adopt a cautious view on listed property in the short term, astute investors willing to ignore and avoid the largest and most liquid companies in the sector will do well, much like they did in 2013, the last time the listed property sector corrected,” he said.