The selection counts

Posted On Friday, 19 February 2010 02:00 Published by eProp Commercial Property News
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The ups and downs in property shares look quite restrained compared with the equity market. In 2008, the property unit trusts (PUTs) had a negative return of 9,7% compared with a 23,2% decline in the all share index. The recovery was also less dramatic, with a total return of 18,7% in PUTs compared with a 32,1% return from equities in 2009.

Evan JankelowitzBut most investors buy property shares for yield rather than capital gains.

With a forward yield of 9,3%, property shares now trade almost exactly in line with 10-year bonds. A year ago investors would have got more income out of property shares than from gilts.

Vuyani Bekwa, co-manager of the Investec Property Equity Fund, says there were concerns that there was going to be an oversupply of property as demand for retail, industrial and office space fell. But apart from a few decentralised nodes such as Century City in Cape Town — where there was a spate of office-building to cash in on the success of the Canal Walk shopping centre — vacancies have remained low, and well below the 25% level reached in Sandton back in 2002.

Investec’s research shows that all the listed property shares had vacancies of between zero for leisure specialist Hospitality (empty rooms at properties such as the Crowne Plaza, Rosebank do not count as vacancies by this definition) and 8,5% for Redefine, which now includes the B-grade Johannesburg and Pretoria CBD properties held by the old ApexHi

The exceptions are Premium and Octodec, with vacancies of more than 20%. But their business model is to convert properties from residential to office, and sometimes the other way round. These properties remain unlet during the conversion process.

Property company management has undoubtedly improved. For example Pangbourne has reported a 10,5% increase in its distribution (as dividends are called). Over the past two years under the management of the Resilient Group it has begun improving the tenant mix at problem centres such as the N1 Value Centre in Cape Town and the Boardwalk Inkwazi in Richards Bay.

Property companies are usually quite scrupulous about making realistic predictions for their distribution growth. A serial offender, though, is Old Mutual controlled SA Corporate, which has missed its forecast distributions (that is, paid less than it promised to), and it has been punished by the market. It now offers a yield of 11,2%, making it the cheapest share in the property sector.

Evan Jankelowitz, co-manager of the Stanlib Property Income Fund, says that this yield might look tempting but some of Old Mutual’s shopping centres are approaching 30% vacancy levels, at which point the centres are unlikely to recover.

In contrast, Bekwa says Resilient has a yield of 7,5% because it has such strong growth prospects. It has retained a clear focus under MD Des de Beer It recently announced a solid 14% growth in distribution for 2009, not an unusual achievement for the group.

Theoretically, the yield reflects the risk in the share, but this is not always the case. There are anomalies, and fund managers can sweeten returns if they spot them. Jankelowitz believes that Vukile, with a yield of 9,4%, has been priced as if it is about to fall apart. Yet its gearing of 33% is not exceptional and the vacancies of 4,1% are well below average. And it has still been achieving 12,5% rental increases in its office portfolio. Sanlam recently gave up management control, which adds some uncertainty, but it could also mean corporate action is not far away. Redefine is thought to be a possible suitor.

Bekwa says investors need to remember that bonds have some scope for capital gains if the economy recovers faster than anticipated and inflation falls further. But conventional bonds can never provide the same long-term inflation hedge as a well-managed portfolio of property.

The property sector has been transformed over the past few years from a patchwork of untradable shares into a number of tradable shares. Growthpoint, the first domestic property share to join the Alsi 40, is used by many investors as a proxy for the sector. Bekwa warns that this won’t always be appropriate. Vacancies are creeping up and with gearing of 36% it has a debt-equity ratio well above the rest of the sector.

The alternative to buying and holding on to Growthpoint or Redefine is to buy into a property fund of funds, such as the Stanlib and Investec funds. Coronation is also a strong competitor. But this means paying about 1,5% a year in management fees to run a diversified fund.

If you do this you must be aware of whether the fund mandate is to be fully invested or if it has the right to invest up to 50% in cash. Often these two types of funds will have materially different returns in any given year.

Some funds will have the mandate to buy shares in Liberty International, which adds diversity but could dampen the portfolio’s income, as the share currently yields about 3,6%.

Last modified on Monday, 28 April 2014 17:20

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