By Reginald Tachie-Menson

The global economic environment today has experienced a number of changes in comparison to pre-recessionary times. More developed countries have generally fared worse in their emergence from the cash-strapped period and this in turn has resulted in a changed dynamic between the financially stronger nations and certain 'developing' countries.

The strengthened rand is a local example of a change in the economic landscape and has numerous resulting implications. But what does this mean for property investors? Is this the time to look overseas? Keillen Ndlovu, head of property funds at Stanlib, observes that this may be a great time to add an overseas component to the property investor's portfolio.

Ndlovu says it is probably the best time to increase offshore exposure to take advantage of the relatively strong rand.

"In a balanced portfolio it makes sense to have offshore exposure for diversification purposes."

There are opportunities across the world. The market is slowly peaking up off a low base. Prices have somewhat corrected but they are still far off from the peaks achieved in 2007. Asia however is the more compelling region driven by strong GDP growth relative to the global peers.

Ndlovu says global listed property is offering a one-year yield of 4.4%. This is at a discount to the 10-year bonds trading at generally less than 3%.

Property fundamentals are improving off a low base. The retail sector was the first to turn around. The office market is picking up across most regions. For example, London office market bottomed at around GBP41 per square foot. Rentals are now around GBP52 per square foot.

Singapore's shopping centres held up during the recession. Despite the recent additional supply they have virtually no vacancies. Notwithstanding capital risk, it is reasonable to expect capital growth in the medium to long term.

Ndlovu adds that foreign influences in our local markets are fortunately not on a particularly grand scale.

"We are glad that offshore players never had huge exposure to our market. They could have sold off our market in line with the global property markets. Offshore investors own about 4% of the SA listed property sector. Compare that to the All Share Index which is about 28%."

Ndlovu says South Africa's market held up relative to the global markets in 2007/8 as a result of low gearing, no major corporate tenant failure and earnings based mostly purely on rental income. This is unlike offshore where the companies were highly geared and could not roll over their debt when the banks collapsed. When banks and some retailers collapsed, vacancies shot up and some of the earning had non-annuity income such as fees and trading profits (these are the first to suffer in a recession).

In terms of the local market, there is still positive activity.

"We expect income to grow by about 6% in the next year."

This is ahead of the economists' inflation forecasts. In the long term an income growth in line with inflation is expected. At present the listed property sector is offering a one year forward yield of 8.2% (driven by 6% income growth).

However local risk factors are present. Ndlovu explains that the biggest risk to the SA listed property market is the rising bond yields.

Foreigners have been big buyers of bonds year-to-date. If they decide to pull out that will push up bond yields (which leads to weaker bond prices) and that is likely to hurt the listed property market. There have been recent indications of less appetite and more sales of SA bonds than earlier in the year by foreigners. Listed property is highly correlated to the bond market because of its income generating ability and the fact that listed property earnings can be predicted with reasonable certainty.

Source: AFP