Listed property still outshines other asset classes

25 April 2013 - Ingé Lamprecht

Performance expected to remain volatile.

JOHANNESBURG – Listed property was the star pupil of asset classes during 2012 with a total annual return on investment of around 36%, but most analysts warned that the sector would not be able to continue its dominance going forward.

However, it seems that listed property has defied the odds – in the short term at least – and has rewarded investors with a return of around 12% in the year to date. This performance is much better than the equity market that saw negative growth of about 1% during the same period. Listed property also outperformed the bond market that realised a return of around 4% in the year to date.

Against the odds?

In an interview with RSG Geldsake with Moneyweb, Anton de Goede, property analyst at Coronation Fund Managers, said the listed property sector’s yield movement in 2012 was in line with bond yields, resulting in the high returns as delivered.

In the year to date however, the performance has been driven by a rerating relative to bonds, with the sector at one stage the most highly rated relative to bonds since 2011 and close to the highest rating in two years. The strong performance was in addition partly driven by strong underlying trading volumes with a record trading value month achieved in March assisted by record index levels. This was mainly due to increased trading in the last week of March related to JSE index and free float changes. Investors in search of an income yield during the current period of low interest rates have increasingly continued to invest in the sector, he noted.

De Goede said there might have been an expectation that interest rates hikes would become a reality sooner rather than later, however, it now seems that the Reserve Bank will keep interest rates lower for an extended period of time.

Should you invest?

De Goede says the number of recent listings in the sector – including companies like Delta, Rebosis, Vunani, Arrowhead, Ascension and Synergy, just to name a few – is still relatively small and since it may not be on the radar of large equity investors, one could still expect an income yield of 8% or more. Compared with the sector’s current performance of 6.5% (income yield), a figure of 8% is quite good, he said.

However, investors should expect the performance of the listed property sector to remain volatile, he said. It will be a function of movements in bond yields, which will depend on inflation and the direction of the Reserve Bank’s data.

While interest rates remain low, the sector should provide relatively fair returns with income yields of between 6.5% and 7% and a possible capital return on top of that, De Goede said.

As soon as interest rates start heading north though, the sector could start feeling the pressure, he said.

The results, trends and prospects

In a follow-up interview with Moneyweb, De Goede said that February came with an onslaught of results releases, with roughly two thirds of the sector’s market capitalisation reporting financial results. The sector delivered a pleasing 9.3% distribution growth, even when excluding the strong distribution growth from New Europe Property Investments (Nepi), the 7.4% sector average is moving closer to in force escalations, he said.

Individual company distribution growth varies from 24% by Vunani to 3.5% for Emira. The results season did point to a few noticeable trends, De Goede said.

“In general, vacancies are either stable or decreasing due to the funds disposing of weaker properties, many of it to smaller, competing funds. Retail and industrial vacancies remain the strongest and below the historical average, with some recovery in office vacancies, but mostly for those companies where the office vacancy base is high. Reversions are loosing momentum with the bulk still positive, but at lower growth rates. Office reversions remain under pressure, with some recovery coming through in the P and A grade space. Overrenting in some long industrial and retail leases (i.e. ten or 15 years) coming up for renewal do provide once-off hits to landlords.”

De Goede noted that property operating cost increases seem to be contained for the first time in a few years so that it increases in line with rental escalations.

“The funds with either a larger number of properties or geographical diverse portfolio seem to be struggling with property operating costs. With many local authorities updating their valuation rolls in 2013, the risk is that a substantial increase in rates and taxes could become an issue for landlords again. Arrears and bad debts seem to have experienced little movement. However, administration costs are increasing at much higher rates than escalations, thereby detracting from the bottom line.”

More funds are entering the Domestic Medium Term Note (DMTN) market as funding source with some even targeting 50% of its funding coming from the capital markets, de Goede said.

“With interest rates at multi-year lows, funds are also prepared to capitalise swap break costs to lower their average funding costs, some increasing their exposure to variable interest rate funding. When it comes to portfolio positioning the more established funds are spending capital on existing properties through redevelopments, refurbishments or expansions, while decreasing their exposure to tail end properties. In turn it is the more recently listed funds that tend to acquire these properties.”

Portfolio activity between listed property companies, additional acquisitions and subsequent equity issuances continue to be a trademark of the sector’s landscape, he said.

“We expect this to continue as the more recent listings are all on aggressive growth paths, many of them acquiring assets already within the sector. The battle over the assets of Fountainhead has also triggered the remaining property unit trusts (PUTs) within the sector, namely SA Corporate, Sycom and Capital, to closely look at the relationships with their respective management company shareholders, putting all of them on some type of path of effective internalisation, similar to what Emira has done in the past.”