It has undoubted merit, but for investors contemplating the plunge into what has been the best-performing asset class since 2006, the big question is whether it’s the right time.
Views on timing are polarised and analysts emphasise the long-term nature of a commitment to listed property. Among them, Evan Jankelowitz, a director of property specialist Sesfikile Capital, advises: “If you are happy with the yield [on property] you should not concern yourself about interim movements in prices.”
Perhaps, but many fund managers are not convinced. “We are very hawkish on listed property,” says Coronation Asset Management senior portfolio manager Louis Stassen
Bond yields are his key concern. “Bond yields have corrected [upwards] but there is more to come. We are just at the bottom of the interest rate cycle,” says Stassen. “There is a risk of capital loss [in listed property] over the next six to 12 months,” he warns.
A fall in bond yields combined with a strong, positive rerating relative to bond yields has been responsible for much of the listed property sector’s performance. In 2010, for example, almost half of the total return of 29,6% on property loan stocks (PLS) was attributable to their rerating.
RMB Property Fund manager Norman Mackechnie also voices a strong word of caution on the sustainability of the listed property bull market. He believes bond yields (now 8,8%) could spike above 9% under the pressure of selling, particularly by foreigners, the primary drivers of bond market strength in 2010.
Foreigners were voracious buyers of SA bonds in the first three quarters of 2010, spending a net R80bn. This changed in the fourth quarter, with aggressive selling from November leaving net foreign sales at R24bn, says Investec Asset Management He adds that foreigners kept up the selling pressure in January and net foreign sales totalled R8,5bn by January 27.
The impact of selling was a swift rise in bond yields, by 100 basis points over the past four months.
Mackechnie puts into grim perspective the potential impact of a further jump in bond yields on the five largest listed property stocks — Growthpoint, Redefine, Hyprop, Pangbourne and Resilient — which account for over half the capitalisation of the 17-member PLS sector.
He says assuming an 8% average increase in distributions over the next 12 months, a rise in bond yields to 9,5% and the differential between income and bond yields remaining constant, the return from the five property loan stocks will be in the order of 1%. A derating of property yields relative to bond yields cannot be ruled out either, he adds.
Another of Stassen’s concerns is that valuations of listed property stocks have run ahead of the physical property market. “There is a disconnect,” he says.
Property economist Erwin Rode supports Stassen’s view. On retail property, the sector most favoured by listed property analysts, Rode notes: “Because of the recent upsurge in consumer spending, people are upbeat on prospects for retail property.” But he cautions that consumer debt is too high to sustain strong growth in consumer spending.
On offices, the most depressed property sector (see page 47), Rode believes the woes will continue. “Vacancies are at 10% on average and will have to fall to about 5% before we see any upward movement in rents,” says Rode.
On a positive note, he adds that because new office building activity is low it could become “a landlords’ market”, perhaps two years from now.
His view on industrial property is simple: “While the economy is not booming, don’t expect much.”
Mackechnie points out that strong earnings distribution growth in recent years was in part driven by falling vacancies and rising rentals. He adds that major listed property stocks have also reached a size where it is becoming difficult to make acquisitions that have the big boosting effect on their earnings growth they had in the past.
A slowdown is already clearly evident in distributions by property loan stocks, which, according to the Property Loan Stock Association, fell from peak year-onyear growth of 19,6% in the first quarter of 2008 to 5,95% in the third quarter of 2010, the lowest increase in 18 quarters.
Even listed property bulls are sounding short-term warnings. “We are property bulls over the next three to five years,” says Trillian Asset Management MD Daniel Roy But he concedes that listed property is a small asset class that has benefited from a surge in interest caused by uncertainty in the equity market.
“Unfortunately, private investors tend to chase after a sector only when it has already performed well,” says Roy.
It has performed so well that another warning sign of a market at an advanced stage of its bull cycle has appeared: a spate of capital-raising exercises.
Among these is an initial public offer (IPO) planned for Old Mutual’s Triangle Real Estate Fund. The total value of the listing will be about R12bn, including a targeted R5bn to be raised in the IPO scheduled for mid-2011. Mackechnie says Investec is also waiting in the wings with an IPO.
“When the IPOs start coming it tells you one thing: they know prices are full and the best growth is behind them.”
