Listed property to achieve lower returns

Commercial property to let.photo by Simphiwe Mbokazi

Commercial property to let.photo by Simphiwe Mbokazi

Published Jan 25, 2015

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The listed property sector is expected to achieve a significantly lower total return this year than the 26.6 percent achieved last year in terms of the South African listed property index.

The sector outperformed other asset classes last year, with South African equities and bonds delivering returns of about 10 percent and cash (of) 5.90 percent.

Naeem Tilley, who heads up listed property at Avior Capital Markets, said that South African listed property had also comfortably outperformed all three other assets classes over 10, five and three years and last year was the sixth time in the past 10 years the sector had outperformed equities, bonds and cash.

Sluggish economy

Stan Garrun, the managing director of Investment Property Databank South Africa, believed this year will be tough for the sector.

Garrun attributed this to the sluggish economy, property rentals being under pressure and vacancies remaining sticky with no signs yet of any turnaround, while retail sales were expected to “take a hit”.

Interest rates were on the way down and inflation could soften but the fundamentals would “take the cream off the top” of the performance of the sector, he said.

Garran did not believe that the listed property sector would have as good a year this year as last year, largely because of the economic fundamentals.

Anton de Goede, an analyst at Coronation Fund Managers, said that the listed property sector would be supported this year by lower longer-term interest rates and lower inflation.

Laurence Rapp, the chairman of the SA Real Estate Investment Trust Association, said despite a tough operating environment, listed property exceeded market expectations last year to produce capital returns of 18.59 percent and income returns of 8.05 percent.

Keillen Ndlovu, the head of listed property funds at Stanlib, attributed listed property’s strong overall performance to better-than-expected results, with income growth largely boosted by counters with some offshore earnings and the benefit of a weaker rand, and local property fundamentals remaining fairly good despite a weaker South African economy.

Ndlovu said that since 1994, the average income growth from the listed property sector had never been negative.

“As a result, listed property has a weaker relationship compared to equities. Listed property has a stronger relationship with bonds, mainly due to the stable nature of the income.

“Yet listed property will outperform bonds over time because listed property provides growing income whereas bonds do not,” he said.

Forward yields

Ndlovu believed income will be a bigger component of listed property’s total returns this year and Stanlib foresaw income growth of about 8.5 percent over the next 12 months, resulting in a forward yield of 6.9 percent for listed property.

He said this was below 10-year bond yields of 7.6 percent and cash of 7.1 percent, but listed property provided the benefit of a growing income stream in comparison to cash and bonds.

Ndlovu expected listed property to deliver a total gain over the next 12 months of between 5 percent and 11.5 percent in Stanlib’s base and bull-case assumptions.

But Ndlovu admitted that based on Stanlib’s bear case this may deteriorate to minus 1 percent if bond yields weakened to more than 8.5 percent from the current 7.6 percent level.

Ian Anderson, the chief investment officer at Grindrod Asset Management, said companies in South Africa’s listed property sector also raised a record R33 billion more new equity capital last year than in the previous year through a combination of initial public offerings, issues of shares for cash to fund growth and dividend reinvestment plans. Ndlovu estimated that the listed property sector raised about R40bn in capital last year compared to R18bn in 2013, making it a record year.

“Virtually all equity raisings were oversubscribed. This indicates the huge appetite for listed property stocks,” he said.

Ndlovu anticipated a slowdown this year in the amount of equity raised and the number of new listings and mergers.

Curwin Rittles of Catalyst Fund Managers said the direct real estate fundamentals would remain challenging over the next 12 months and South African publicly traded real estate companies were likely to continue to deliver inflation-type income distribution growth.

“This will largely be driven by annual rental escalations and support from offshore earnings,” he said.

Neil Stuart-Findlay, a portfolio manager at Investec Asset Management, said overall the benign inflation and interest rate outlook for this year created support for yield-oriented asset classes, including bonds and listed real estate.

He said the listed property sector offered the additional benefit of a fairly predictable, growing income stream through contractual lease escalations.

“Whereas a part of 2014’s distribution growth was generated by debt restructuring and exchange rate gains, growth in the year ahead is likely to be slightly lower but largely organically driven,” he said.

Stuart-Findlay said distributions were still forecast to grow in excess of 8 percent, well ahead of inflation.

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