The return of returns in property stocks

Posted On Friday, 25 March 2011 02:00 Published by eProp Commercial Property News
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Property stock prices have had an overdue shake-out this year, falling 10% since January in their biggest setback since 2008. It’s a shake-out that could present a buying opportunity with the potential of solid future returns.

Mohamed KallaProperty stocks soared in 2010, the property loan stock index pumping out a total return of 29,6%. Driving the surge were falling bond yields and a rerating of these stocks relative to bond yields which accounted for almost half their total return. The upward trend ended in 2011 as government bond yields rose from lows of under 8% in late-2010 to 9% and property stock valuations relative to bond yields retreated to more normal levels.

But Mohamed Kalla, director of property specialist Sesfikile Capital, believes the worst is near an end. “The 12-month forward income yield on property stocks is now about 9%,” he says, “and Sesfikile expects an average rise in distributions of 7% to 7,5% a year over the next 36 months.”

According to property investment firm Catalyst, the nine property stocks which reported results to December 2010 achieved an average distribution increase of 7,5% based on weighted market capitalisations. These stocks represent almost two-thirds of the property sector’s total capitalisation.

“Results were in line with analysts’ expectations,” says Kalla. “They were also achieved despite the impact of higher operating costs and vacancy levels in especially the office sector.”

He adds that vacancy levels will also stabilise and cost increases will be off the high base created in 2010.

The other key component of the property value equation is bond yields. Right now uncertainty stalking global markets is reflected in bond market players’ views.

A big factor in the run-up in bond yields since late-2010, heavy selling by foreign investors, has also abated, says Investec Asset Management’s fixed interest head, Malcolm Charles “Speculative foreign players are now clearly short [of bonds] while long-term foreign investors are staying fast,” he says.

On the positive side, Renaissance BJM Securities’ head of fixed interest, Leon Krynauw, says the market comfortably absorbed upwards of R17bn in new stock issues during the first half of March and US government bond yields which, after a steep rise between October 2010 and early February, have fallen sharply. “Since mid-2008 the most important driver of [SA] bond yields has been US bond yields,” says Charles.

Are property stocks a screaming buy? Traders will have to come to their own conclusion but for investors on the hunt for yield and income growth, it is hard to disagree with the experts that they represent solid value.

Last modified on Tuesday, 22 April 2014 16:14

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