Listed property in 2014
10 December 2013 - Ingé Lamprecht
Is the party over?
JOHANNESBURG – The total return of the local listed property sector has been 5.3% in the year to date, a far cry from the double-digit environment that investors have almost become accustomed to over the past decade.
However, analysts still believe the sector offers attractive, inflation-beating long-term returns, although it might experience some volatility in the short-term.
Anton de Goede, property analyst at Coronation Fund Managers, says 2013 has been a “year of two halves”.
In the period leading up to May, the sector flourished with total returns of up to 20%. However, following the spike in bond yields and subsequently property yields, returns have reversed into negative territory and have fallen about 14% from these highs.
De Goede says over the past ten years, the local listed property sector has really benefitted from fiscal discipline, inflation targeting and the subsequent rerating in the local bond market in general.
But prospects changed in May when it became evident that the Fed would start tapering its quantitative easing program in due course and that the low interest rate environment may soon come to and end.
De Goede says bond yields moved up from levels close to 6% to 8% while the forward yield on property spiked from a low of 6.1% to 7.7% at present.
Property yields have historically been closely correlated to bond yields, since both are yield-bearing instruments, although some argue the instruments should not be considered so closely correlated.
Research conducted by Towers Watson, a UK-based company that specialises in risk and capital management, found that little evidence exists to support the view that rising bond yields necessarily translates into declining property returns.
Erwin Rode, property valuer and economist at Rode & Associates, says the correlation between long bond yields and listed property yields is strange, since property’s income stream grows with about 6% on average while that of bonds is fixed.
It is therefore odd that the market acts on the perceived similarities between the asset classes.
However, one cannot argue with the market and has to accept its behaviour, he says.
De Goede explains that the derating in the property market following the spike in bond yields is related to the sector’s perceived yield prospects.
If a property of R100 has a yield of 10%, the investor can expect an income of R10. However, if the yield suddenly moves to 11% or 12%, the valuation of the property (R100) has to change to reflect an income of R10. This change is seen in the local listed property sector when share prices drop accordingly.
De Goede says while the listed property sector is expected to outperform inflation in 2014, volatility is likely to persist as a result of an expectation that interest rates could rise.
He says although interest rate increases are already being priced into the bond market, any actual sign of increases will still have some negative impact on the sector.
Rode says it is probably reasonable to expect a total return of 10% in 2014.
Leon Allison, property analyst at Macquarie, says he expects a 10% return for the listed property sector next year, of which 7.6% is predictable income yield at lower than market risk.This is based on the current 10-year bond yield of 8.16%.He says the listed property sector is likely to deliver average distribution growth of 8% over the same period. “This implies a 6% to 7% derating in property yields relative to bonds. This may not happen, but then bond yields may rise further.”
Although the environment has changed substantially, listing numbers have not dropped off in 2013.
New listings for 2012
|Annuity Properties Ltd||
|Ascension Properties Ltd A||
|Rockcastle Global Real Est Co Ltd||
|Osiris Properties International Co. Ltd||
|Delta Property Fund Ltd||
New listings for 2013
|GoGlobal Properties Ltd||
|Tower Property Fund Ltd||
|Investec Australia Property Fund||
De Goede says the initial listing price of property companies was important since it would have an influence on the upside for investors. However, subsequent movements in the share price are expected to be mostly in line with those of the sector depending if the companies delivered the income what they've set out to produce at listing.
He expects that fewer property companies will list next year. As interest rates start to increase the yield at which the listings need to take place will not necessarily make sense for companies.
“In a higher yielding environment, listings will be much more difficult to achieve.”
Going forward, it is likely that some of the smaller listed companies will consolidate with larger ones, Rode says.
He says it is very difficult for smaller companies to compete since they can’t optimise their returns. It therefore makes a lot of sense for them to consolidate and to create bigger funds because by doing that they get a rerating from the market which means that, all other things being equal, the income yield would drop, thereby pushing up the price.
De Goede says through the cycle investors can still expect a 10% to 15% total return per annum from the sector, based on an income yield of between 7% and 9% and growth on that income yield.
Rode says it is highly unlikely that the stellar performance of the sector over the past decade will be repeated in the coming years.
However, a 10% total return, in an environment of 6% inflation, is still a reasonable return.
If one considers the alternative investment options, given the broader risks, a strong case can be made for sticking with listed property for the short and medium term, Rode says. This especially applies to retirement funds and assurance companies that do not pay income tax on rentals received.
Allison says over the next three to five year period, the sector could deliver double-digit returns of between 12% and 15%.