The reason property outperformed the other asset classes is because its earnings growth has been defensive in a recessionary environment due to longer leases combined with 8%-9% annual rental increases.
But Stanlib property analyst Keillen Ndlovu said on Friday while property had outperformed all other asset classes so far, “it is important to note that the primary aim of investing in listed property is to get a regular source of income”.
Mr Ndlovu said the interesting thing was that listed property’s vacancies had not increased as much as anticipated and there has been no major corporate tenant failure. Rental levels were also expected to rise next year and accelerate thereafter as the global economic recovery gathered momentum. Limited supply of new space was expected to play its part in driving rentals higher.
Mr Ndlovu said although vacancies had increased, they were still far from the peaks of 2001 and 2002. Institutional investors had been increasing listed property exposure after years of underallocation. The forward yield for listed property was attractive at 9%, beating bonds’ 8,8% and cash at 7%. Listed property’s yield of 9% grew every year, whereas cash and bond coupons did not.
“We expect total returns in the region of 10%-12% (this calendar year),” with about 8,5% of that being income returns, Mr Munzara said. On the growth side, he expected 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 about 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,” Mr Munzara said.
Mr Ndlovu is forecasting income growth of 6,8% in the next 12 months, resulting in a forward yield of 9,1%.
The market was looking forward to next month as the main reporting season for listed property companies starts. The market is also expected to closely watch the trends in vacancies, rental growth, rental arrears, spend per head and footfall.
“We believe the physical property market is nearing the bottom. The recovery, however, will be a muted one,” Mr Ndlovu said.
