Property sector set to continue delivering growth

Posted On Thursday, 09 June 2011 02:00 Published by eProp Commercial Property News
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SA listed property had highest total return of four asset classes for April.

Norbert SasseThe outlook for distribution growth for the listed property sector over the next 12 months remains reasonable and the sector is likely to continue delivering real growth in income distribution .

According to Catalyst Fund Managers, assuming distribution growth of 7%, the forward yield from listed property at the end of April is 8,62%. This compares favourably to the South African benchmark overnight rate of 5,28% and the yield to maturity on the long-term government bond index of 8,47%.

The performance of listed property tends to track the performance of bonds as both are income-generating investments.

Catalyst Fund Managers’ investment manager, Paul Duncan, says listed property income grows, whereas the income from a "vanilla" bond instrument does not. However, Mr Duncan warns the risk to total returns in the short term is a weakening in capital markets.

"The volatility of the asset class will be affected by uncertainty in the capital markets. Listed property is a long-term investment and over the long term the total return from listed property will be driven by the income yield plus growth in that income," he says.

The South African listed property index recorded a total return of 3,71% in April as capital markets firmed during the month with the yield to maturity on the long-term government bond index ending the month at 8,47%, from 8,75% in March.

The historic 12-month rolled yield of the South African listed property sector ended the month at 8,06%.

South African listed property recorded the highest total return of 3,71% of the four traditional asset classes for April, beating equities and bonds, which were the next best-performing asset class for the month, recording a total return of 2,24%, followed by cash with 0,44%.

However, for the year to date, equities, as an asset class, have recorded the highest total return of 3,38%.

According to the South African Property Owners Association and IPD SA property index, the commercial real estate market returned to double-digit total returns last year, with 13,3%, bouncing back from 2009’s 11-year low of 8,8%.

The headline total return is still dominated by the income component, which was 8,9%, while capital growth was 4,1%.

IPD SA MD Stan Garrun says after 18 months of little to no capital growth, confidence and fundamentals began their recovery over the second half of last year, during which period the bulk of the year’s annual capital growth was delivered.

Mr Garrun says stronger retail sales growth and signs of a return to discretionary spending helped to drive capital growth in the retail sector to 4,4%, which was the highest for any sector.

Office and industrial capital growth, at 3,9% and 3,2%, respectively, were slightly more subdued, in part due to concern over fundamentals in the secondary markets.

Above-inflation rental growth continued to underpin the majority of returns, and rose by 130 basis points to 7,4% last year, though yield movements, however, remained conservative across all sectors.

While the optimism surrounding the retail sector was reflected in a slight 12-basis-point firming of the yield, office and industrial properties saw a softening of yields, by seven basis points and 33 basis points, respectively.

Mr Garrun says a noticeable increase in the yield spread between market segments underlined the significant performance variation between prime and secondary assets.

Mr Garrun says across the market, vacancies decreased from 7,4% in 2009 to 6% last year. Again, there is a clear split between prime and secondary.

Large shopping centres and prime offices remained well let, but vacancies continued to rise in secondary markets, such as B- and C-grade offices and neighbourhood shopping centres.

At the end of last year vacancies stood at 5,2% for retail, 10,6% for offices and 5,4% for industrial properties.

Norbert Sasse, CEO of SA’s largest property group, Growthpoint Properties , says retail is coming out of the blocks first from the recession.

But he says the office sector is still in a challenging position with double-digit vacancies.

Mr Sasse says the dynamics are different in the industrial sector, which is performing slightly better than the office property sector.

Mr Garrun says while capital growth has nudged back into positive territory — even if it is only at 2008 levels — it is income which again continues to drive returns and sets South African property apart.

"As we enter the next recovery phase, it will be the good management of property fundamentals that enhances these income streams, and that will distinguish investors in the market."

Last modified on Friday, 25 April 2014 19:24

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