Property rerating to narrow yield gap.

Posted On Monday, 03 March 2003 02:00 Published by eProp Commercial Property News
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The listed property sector of the JSE Securities Exchange SA is set for a rerating which should narrow the yield gap between the sector and bonds, says portfolio manager of Coronation Fund Managers, Kirshni Totaram.


Property-Housing-ResidentialSuch a rerating would further boost the standing of listed property as a viable investment asset class among various other investments such as bonds, equities and cash.

Totaram says there is an increasing awareness of the role that listed property can play in the construction of income producing portfolios.

Property yields stand at about 14%, which is 3,5% above those of bonds on a one-year-forward basis.

This yield differential is way above the long-term average differential of 1,8%, Totaram says.

Totaram says that property yield is equivalent to the bond yield plus a spread or premium required by investors in property.

The spread is essentially determined by four factors.

These are the lower liquidity of property stocks relative to bonds, the higher risk given that property stocks are not backed by government guarantees, the prospect of earnings growth and the fact that unlike bonds, property stocks do not mature over a fixed time period.

Totaram says the appropriate spread taking all these factors into account should be about 2%.

"We expect earnings growth of the sector to be flat or slightly down this year, but this spread should start narrowing given improved earnings growth prospects for next year," she says.

Turning to property market fundamentals, Totaram says "we foresee a turnaround of the office market over the next two years".

Speculative developers have moved out of the office market which should push the market into equilibrium.

The industrial sector could struggle again, though, said Totaram, but she expects that the retail sector should continue to perform well.

Overall, the expected interest rate cuts will boost general economic activity and this should underpin earnings growth of the property companies next year, says Totaram.

"We anticipate a lot of corporate activity in the listed property sector of the JSE going forward," she says.

Totaram says that she expects more listings of property funds through the securitisation of property portfolios of institutions.

This activity should help improve the liquidity within the sector and promote more acute stock selection among investors.

Last modified on Thursday, 08 May 2014 17:08

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