THABANG MOKOPANELE

Property Editor

THE South African listed property sector delivered a strong total return of 9,86% as an asset class for the first quarter of this year with 6,65% capital and 3,21% income, outperforming both equities and bonds.

But Stanlib property analyst Keillen Ndlovu yesterday said the risk for the listed property market in the medium term remained in the bond market due to huge issuances (supply) by both the government and corporations.

The performance of listed property tend to track the performance of bonds because they are both income generating investments. Both equities and bonds returned 4,48% and 4,45% total return respectively in the first quarter of this year as asset classes.

Ndlovu said the strong run by listed property had been driven by the positive sentiment in the bond market, strong currency, a less onerous budget deficit, inflation falling within the target range and a more positive gross domestic product outlook.

“There is a strong correlation between the property market and the bond market due to property’s reliable income generating ability. Over the last year the property bonds correlation has been strong at about 70%,” he said. The property and equities correlation has only been about 20%.

Ndlovu said the low correlation to equities made property “a good” diversifier in a balanced portfolio. Property companies that reported results so far delivered an average 7,8% growth in distributions, which was off the peaks of 2007-08 but still decent given that the results were achieved in a recession. “These companies have signalled a relatively stable outlook. We are forecasting income to grow 7,5% in the next 12 months. This is well ahead of inflation,” he said.

But tenant’s arrears and vacancies were still increasing, although at a much slower pace, which implied the sector could be approaching the bottom.

Ndlovu said there had also been huge inflows into the listed property sector (new money). “More than half of the listed property companies paid out their distributions in the last two months. Most portfolio managers re-invested the cash back into the sector,” he said.

The listed property sector was trading at a forward yield of 8,7% beating bonds (10-year) at 8,6% and cash (one year at 7,4%).

Property offered growing income, whereas bonds and cash did not. Ndlovu said the retail property market was approaching a recovery stage, but the office market was still feeling the pain of oversupply. Industrial property rentals were cooling off from a very high base.

Eskom’s electricity hikes were expected to push up the cost base for tenants and this could have a negative effect on the landlord’s rental bargaining power.

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Source: Business Day