Experts predict a tough 2016 for SA's property sector
Experts are predicting a difficult year for listed property. Many forecasters have said that the sector won't get near double digit total returns this year unlike many years in the past where double digit returns were commonplace.
Economists are concerned that SA’s economy will barely grow this year.
The International Monetary Fund recently forecast 0.7% growth for 2016 which will make operating environments highly difficult for property developers and even owners, reports Ortneil Kutama, SA Commercial Prop News Media Director.
Some property stock investors are choosing to rely on offshore based property stocks listed on the JSE doing well. There are also South African property companies which have exposure to offshore property, which could enjoy a good 2016.
"While the returns overall from these companies could be good and beat inflation in SA, they won’t necessarily shoot the lights out,” Kutama says.
Keillen Ndlvou, head of listed property funds at Stanlib has forecast income growth of 9% to 10% this year.
He says this growth has been boosted by increased offshore exposure and a weaker rand. If one stripped out the offshore exposure the income growth would slow down to 6% to 7%. Offshore earnings now make up over a third of the SA Listed Property Index, according to Mr Ndlovu.
“In terms of total returns, capital growth looks like a challenge to achieve this year given potentially higher interest rates and higher bond yields. Listed property is offering a one-year forward yield of just over 7.5%,”Ndlovu says.
The South African Reserve Bank is currently involved in an interest rate hiking cycle. This could lead to increasing bond yields and hence lower bond prices. Listed property tends to move closely in line with bonds as both are income generating investments.
Evan Robins, Head: Listed Property, Old Mutual Investment Group, is not expecting an impressive return from listed property on the JSE this year.
“My guess, if we assume that bond yields remain at their current levels, would be for a total return from the South African listed property index of around 5% for calendar year 2016 – this takes account of the fall we have already experienced. Year to date, these types of short-term estimates should be taken lightly as there are so many moving parts,” says Robins.
OFFICE PROPERTY MARKET
2016 is not expected to be a good year for offices but improvements after years of poor performance are expected to filter through. Vacancies are rising in upper market business nodes such as Sandton and Rivonia. A grade office space is being filled up more quickly as companies’ scale back. Nevertheless, some larger companies are taking up space in new big premium offices, such as Webber Wentzel. Growthpoint Properties is building an office for the Discovery group. Property companies are encouraging new companies to take up old office space as opposed to overspending on new space.
RETAIL PROPERTY MARKET
The Retail sector continues to display strength leading in the testing times. As a developing economy, the country is attractive for more and more offshore companies. The weak Rand will also positively affect the exporters and industrial tenants that occupy these premises.
INDUSTRIAL PROPERTY MARKET
Industrial property remains underrated. Capital Property Fund bought a large chunk of it in 2015. It is now a part of Fortress Income Fund. Some new entrants to the industrial space such as Equites are also looking to develop areas such as the Western Cape.
RESIDENTIAL PROPERTY MARKET
Residential is an exciting space for property investors. JSE listed companies who have not worked in the space before are investing. There is a tremendous demand for housing in South Africa. The likes of Indluplace Properties and Octodec Investments Limited are seeking to fill the housing gap. Residential is expected to boom this year in terms of returns but it may not match retail's performance.
LISTED PROPERTY MARKET
Investors need to appreciate that listed property in SA is a long term game. While they may try to beat equities and bonds each year, it is not certain that they will do so successfully each year. This is why the investors need to invest in the listed property index for a few years at a time.
This does not mean that investors should not also look for direct investments into separate stocks. There are various property stocks in SA which are expected to beat the index in 2016 and to beat the JSE.
Investors are also encouraged to put some money into direct property in other African countries like Kenya, Nigeria, Zambia, Ghana Egypt and Morocco. Renting out properties can bring strong returns and some analysts believe renting directly owned properties will be a strategy that challenges listed property in 2016, with direct beating listed for the first time in years.
Some commentators are expecting listed property to reach a total return of between 8 and 10 percent between 2015 but direct property to deliver about 15 percent.