SA's REITS 'better value' than in UK and Australia

Posted On Thursday, 24 March 2011 02:00 Published by eProp Commercial Property News
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South African retail investment trusts offer better value than their UK and Australian counterparts, according to Angelique de Rauville.

Angelique de RauvilleSouth African retail investment trusts (REITs) offer better value than their UK and Australian counterparts, according to Angelique de Rauville, property portfolio manager at Investec Asset Management.

"From an economic perspective, SA is somewhat better positioned than many global economies and a far more comfortable place for us to invest in listed property than for example the UK, which saw its economy contract in the fourth quarter [of 2010] and where inflation is therefore running well ahead of GDP growth," she said.

By comparison, both SA and Australia, as resource-based economies, were benefiting from the global demand for commodities.

Both economies were growing at a rate that was more or less in line with inflation. SA was poised for economic growth close to 4% this year and inflation was contained within the band target band at 3.7%, an analyst said.

"Forecasts for Australian GDP growth are in the region of 3.5% and inflation, which is running at 2.7%, is within their target band of 2%-3%. There are some risks to their growth forecast, however, on the back of the recent flooding in Queensland," De Rauville said.

One advantage SA has over Australia is that "we believe domestic interest rates are relatively contained at current levels, while Australia will be inclined to continue hiking interest rates ahead of many global economies, including SA. Given the correlation between interest rates and yields on property, an increase in interest rates would imply a softening in yields in listed property."

The South African sector was trading at a more "attractive" forward yield than that of the UK and Australia. In SA, the yield on listed property was currently 8.8%, while in Australia it was 6.6% and in the UK 3.9%.

"In addition, we are seeing better distribution growth from listed property stocks out of SA. We are expecting the South African listed property sector to produce growth in excess of inflation at about 6%-8% for the next year, and we believe this to be sustainable in the long term," she said.

The Australian listed property sector was likely to see growth of 3.5% and the UK 4.2%.

Although growth in UK REITs would be slightly ahead of inflation, they were trading at a significantly lower forward yield and Investec was concerned about the UK from an economic perspective.

"We are no longer worried about the health of balance sheets in the UK or Australia, as these have been aggressively recapitalised after the global financial crisis," she said, adding that a great advantage for the South African sector was that the balance sheets were never in as bad shape even at the height of the financial crisis, so local companies were not in the position where they were forced to recapitalise their balance sheets at deep discounts like their counterparts in Australia and the UK had to do.

Thanks in some part to exchange control regulations, the SA REIT sector had not internationalised to the same extent as Australia and the UK. Given that they therefore did not have to deal with the concomitant portfolio restructuring issues faced by the Australian sector in particular, they were on the front foot and could afford to be acquisitive.

De Rauville cautioned though that it was not all good news for SA. "There are some nodes of commercial property that do concern us, particularly B-grade offices, due to a legacy of overdevelopment.

We are also cautious on heavy industrials, which can be linked to the strength of the rand. Internationally there is a flight towards better quality and we see the differential between A-grade assets and secondary and tertiary assets increasing substantially.

Last modified on Friday, 18 April 2014 15:57

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