MONEYWEB: Wayne, just to put it in perspective, we’ve had interest rate increases which are not good for the property sector. The view is that next year we are going to have interest rate falls, some economists saying three or maybe even four cuts in the year ahead. The rand does look like it’s at least stable – might even get stronger with everybody else trying to lower their own currency. So the rand almost by default is going to hold its level. I did ask you if you would look at the property sector for us. What did your research show you?
WAYNE McCURRIE: Alec, I think the important thing to look at is the actual yields that the property loan stocks and the property unit trusts are trading on. So I’m talking about those two specifically. So I’m excluding Liberty International from the definition of property in South Africa. And the loan stocks are trading at a 14.7% yield, and the unit trusts at a 13% yield.
MONEYWEB: And the difference between the two?
WAYNE McCURRIE; Not that much difference between the two. Essentially, it’s exactly the same, it just depends on structure. Unit trusts couldn’t have gearing, loan stocks could – but now even that’s changed. So essentially there is no difference between them. So they’ve got an average yield of let’s say 13.5, 14%-odd. Of importance is to look at it in relation to the long bond yield, because that is the discount rate that you would use to compare the property unit trusts and the loan stocks.
MONEYWEB: So just to clarify this, you would get around 14% if you buy into historic dividends?
WAYNE McCURRIE: Yes, dividends paid out.
MONEYWEB: So if you were a bank investor and you get 7%, you realise you get that double that on a property loan stock. Why do you compare it with the government stock rather than a bank deposit?
WAYNE McCURRIE: You can do either, just the government stocks are a longer-term interest rate. Essentially you are doing exactly the same thing. You can compare it either against the long rate or the short rate. I prefer the long rate because that’s a more realistic view of longer-term interest rates. So just to compare the two against that, they are both trading at about a 30% higher yield than the long bond rate. To me, that’s an absolutely undervalued level. That is just too high. It's been there once before, and here I am talking specifically of the unit trusts. In 1978, 1979, it traded at about this yield against the long bond.
MONEYWEB: And what happened after that?
WAYNE McCURRIE: An unbelievably large return from them. I mean, they gave, over the next five years, they gave about 200% in total return, including the dividends paid out. And in 1998, they were at a very similar level after the Asian crisis, and there they gave you about a 100% return. So certainly the current yields now are discounting extremely bad news, that I don’t think is going to come about. Sure, the results going forward are not going to be great. We’ve already seen a few report, and they are flat and slightly down. But at the 30 or 40% extra yield against the long bond, I think this is an extremely good time to get into property unit trusts. As I said, it’s only been at this valuation level twice in the last 25 years. So I think it’s a very good opportunity.
MONEYWEB: Where is the average then, where should they be trading compared to the long bonds?
WAYNE McCURRIE: The 30-year average is at about 0.6. So now it’s more than double that. I don’t think it’s going to go back to 0.6, I’m not saying it. But that is the 30-year average. I think a slightly below one, maybe a 0.9 is a realistic level. But that’s still a 30 to 40% …
MONEYWEB: So it’s now 1.3, 1.4 by comparison. So as you say, the share prices need to double to get to the average?
WAYNE McCURRIE: The 25-year average. I don’t think they are going to go back to that. I think that was overvalued, I think that 0.6 is way overvalued. But a 0.9, in other words let’s say a 40% appreciation in the actual share price, will bring it to a more realistic level. That’s what I think where we are going to.
MONEYWEB: If we buy that argument, and I think it’s very difficult not to, are there any stocks in particular that jump out at you?
WAYNE McCURRIE: Alec, I’m not an expert on the individual stocks. So I basically stuck to the real stalwarts, and the big ones, I thought a portfolio of Grayprop and Hyprop and maybe Sycom, they are all trading at between a 12 and a 13% yield. And, as a bit of a sweetener, I stuck in Apex B. I think it’s quite a good concept that they’ve got, of just paying out the yield. They are trading at almost a 20% yield. So that’s where I would actually go – just stick to the big ones and maybe put a little bit into something like Apex B.
