Boom for listed property
15 July 2012 | MICEL SCHNEHAGE
Grindrod Asset Management chief investment officer, Ian Anderson, says that since the beginning of the year, the listed property index returned 22.9% while the South African equity market generated a return of 8% and the bond market 8.8% over the same period.
Anderson says the strong gains registered by the listed property sector reflect a growing appetite among investors for higher yielding securities. It also reflects an increase in foreign investment into the larger listed property companies, improving property fundamentals and an improved outlook for distribution growth across the sector.
Anderson and investment manager of Catalyst Fund Managers, Paul Duncan, agree the returns have been surprising. Anderson says: “While the magnitude of the year’s capital gain has been somewhat surprising, I did start the year by saying that SA’s listed property sector was under-appreciated by most asset managers in South Africa and as a result, was significantly undervalued relative to both the bond and equity markets.”
Duncan says property as an asset class usually delivers returns of between 12 and 14%. The high performance in the year to date has largely been due to external factors.
“There has been a significant firming in government bond yields.
There is a high correlation between property yields and government bond yields.
If the latter firm up, in other words they decline, then property yields tend to decline with them.
“That’s effectively what has happened.
The market has said interest rates are going to remain lower for longer.
The market appears to be pricing in the probability of a rate cut at some point in the future.
What that means is that property yields look 50 basis points more attractive today than they did yesterday.
If that’s the case, the yields can come down and if that happens, the share prices go up.”
And that’s exactly what has happened. recently.
Anderson says foreign investors encouraged by strong signals from Treasury that a Real Estate Investment Trust regime is on the cards for SA have been attracted by the higher income yields and income growth prospects on offer in the listed property market.
At the same time, larger institutional investors have also woken up to the fact that listed property is forecast to produce significant inflation beating returns over the medium term and is likely to outperform both the bond and equity markets over the next three to five years. Listed property does provide some downside protection for investors in a volatile equity market.
Anderson adds: “With property fundamentals improving due to limited new supply, income distribution growth should exceed inflation over the next three to five years.
Investors are therefore still able to achieve a real income yield (ie the income yield minus inflation is positive) and the prospect of real income growth over the medium term.
No other asset class in South Africa offers both a real income yield and real income growth.”
Duncan says, however, the current returns are not sustainable and are largely driven by the influence of capital markets. “It’s not like property companies are delivering exceptional growth all of a sudden. A real driver of the outstanding returns has been what’s happening in capital markets and property has been the beneficiary.”
Anton de Goede of Coronation Fund Managers says listed property has followed bond yields very closely over the past few months. He says despite the weaker rand, SA bonds continue to gain, largely taking their lead from the downward trend in US bond yields.
He adds: “Inflation expectations seem to be less bearish than earlier this year, while dovish statements by the SA Reserve Bank (SARB) point to likely interest rate intervention should economic and financial market signals out of Europe deteriorate further.”
SARB’s Monetary Policy Committee is meeting this week amid some expectations Governor Gill Marcus may announce an interest rate cut. Rand Merchant Bank global markets research analysts have pushed their forecast of the first interest rate hike to the second quarter of 2014 from the third quarter of 2013.
De Goede says with the listed property sector running so hard year to date, it remains difficult to predict what will happen for the rest of the year, other than it will in all likelihood be closely tied in with that of the bond market.
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