THE local property market is in far better shape than its international counterparts, but analysts warn that this year will still be challenging for the sector.

The South African listed property index recorded 1,85% in total returns as an asset class last month — the highest total return for last month beating bonds, cash and equities.

But on a 12-month rolling basis, equities were ahead of the pack recording a total return of 41,77%, followed by listed property at 24,39%, bonds at 9,34% and cash at 7,90%.

Last month three listed property companies published

But Catalyst Fund Managers investment manager Paul Duncan says comments from listed property management teams confirm that market conditions remain challenging.

“The current economic conditions have influenced the demand for space and therefore one of the primary focus areas of management teams is maintaining occupancy rates at current levels. The take up of existing vacancies is low and market rental growth has slowed,” Duncan says.

Greece’s national debt to gross domestic product, large fiscal deficit and questions over its sovereign risk has created uncertainty over the future of the European Union.

Duncan says this has led to a number of sovereign rating downgrades and also resulted in global financial markets being characterised by increased global risk aversion.

While uncertainty over the outlook for the global economy persists, financial markets will be characterised by volatility. He says listed property as an asset class will not be immune from this volatility.

Kundayi Munzara, head of research at Investec Property, is optimistic about the sector, saying the outlook on the listed property sector is “fairly” positive.

“We expect total returns in the region of 10%-12% (this calendar year)” with about 8,5% of that being income returns, Munzara says. On the growth side, Munzara expects property loan stocks and property unit trusts to deliver 6%-8% distribution growth and about 7%-9% on a 24-month view.

“The listed property sector is undergeared at around 25%, so it is a relatively low-risk sector from a forecasting point of view. In addition, although vacancies have continued to rise in the last five to six months, we expect them to be near their peak and believe they will start to fall within the next six months,” Munzara says.

With the country’s gross domestic product coming in higher than expected, this is likely to benefit the sector as well.

Stanlib property analyst Keillen Ndlovu is forecasting income to grow 6,8% in the next 12 months, resulting in a forward yield of 9,1%. “The income growth of 6,8% is decent given the current circumstance and is well ahead of inflation,” Ndlovu says.

He says the yield of 9,1% is ahead of the 10-year bonds yield of 8,8% and cash of 7,4%.

“Income will be very stable as expected, but the capital is likely to be volatile — the dust has not settled yet in the global equity markets and local bond yields face upward pressure due to supply issues.”

According to the South African Property Market Trends Report published by the South African Property Owners Association, the local property market is in far better shape than its international counterparts.

Although returns have declined for the past two years, capital growth was slightly positive at 0,3%. SA produced the highest nominal returns of all countries measured by the Investment Property Databank.

“So, all in all, we are not in bad shape — going forward don’t expect great excitement — growth is going to be very slow but at least there should be growth.

“Interest rates should remain stable for the medium term, which at these levels will be good for property,” Lew Geffen Sotheby’s International Realty Commercial Investment Property MD Rodney Luntz says.

The total return from South African listed property is expected to be driven by the investment’s historic rolled income yield, the growth over time in that income yield, and the exit yield on the listed property investment at the end of the investment time horizon.

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Source: Business Day