Local listed property not so lekker

Posted On Friday, 27 January 2012 02:00 Published by eProp Commercial Property News
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SA listed property may well have pipped general equities, bonds and cash to the post in 2011 but a total return just shy of 9% is nothing to rave about.

Property-Housing-Residential

“The best returns are likely to come from Australia, as more investors shift from money markets to Reits on the back of lower interest rates”

— GREG RAWLINS

This is particularly so when compared with the 22% return pocketed by SA investors who betted on global listed property last year (UBS global real estate investors index). Granted, the weaker rand was the key contributor to the performance of offshore property stocks, or real estate investment trusts (Reits) as they are commonly known.

But analysts say SA property investors are likely to again make more money abroad than in their own back yards this year — irrespective of movements in the rand-exchange rate.

Though some economists have called the rand at R9/US by year-end, Kundayi Munzara, a director at boutique property asset manager Sesfikile Capital, says global real estate should not be seen solely as a currency play. “Property stocks in some global regions look cheap compared with SA listed property.”

Munzara’s view is based on the yield spread between property stocks and bonds in SA versus that in offshore markets. Investors looking for cash flow generally use bonds as a proxy to assess whether listed property is under or overvalued. And most would require a higher revenue stream from listed property to compensate for the risk associated with potential share price fluctuations.

Munzara notes that the JSE’s listed property index, comprising 28 counters with a market cap around R150bn, tested a record high last week. Investors are now buying SA property at a forward yield (income return) of 8,1%, which is roughly on a par with the current 8,08% yield to maturity on the long-term government bond index. “SA property stocks are thus looking relatively pricey.’’

Munzara says the opposite is true for most global regions, where property stocks are still trading at markedly higher yields than bonds. For instance, in Australia, Japan, Singapore, most parts of Europe and Canada, listed property stocks can be bought at forward yields of at least 6% while long bonds are trading at yields as low as 2%-3%.

Coronation Fund Managers property analyst Anton de Goede has a similar view: “Global real estate offers a compelling value proposition, with most Reits, excluding the US, trading at an average 15%-20% discount to net asset value.”

That’s despite the recovery already seen in global listed property over the past two and a half years. Catalyst Fund Managers investment manager Paul Duncan notes the UBS global real estate investors index, which tracks the performance of close to 300 property stocks across the US, the UK, Europe, Asia and Australia, is up 169% from March 2009 when global listed property hit rock bottom. Even so, the index is currently still trading 27% below its 2007 peak.

So investors haven’t necessarily missed the boat. Though some are still cautious about re-entering real estate after getting burnt in 2008, Duncan says the world is still awash with cash-flush asset managers chasing yield. That should continue to support share prices of property stocks over the next 12-18 months, especially given that real estate funds are trading at higher yields than cash and bonds.

Greg Rawlins, property fund manager at Grindrod Asset Management, says demand will be further underpinned by the fact property companies have had time to restore their balance sheets over the past 2-3 years. Moreover, global real estate markets are set to enter a new rental growth cycle over the next 12 months on the back of limited new building supply.

Rawlins says banks worldwide remain nervous about lending to property developers. “Very few new buildings will come on stream over the next two to three years, yet corporates in main business hubs in many parts of the world are starting to make profits again, which should translate into increased demand for office space.”

Rawlins says that means market rentals will continue to rise over the next 2-3 years as demand starts to outstrip supply, which in turn will lead to higher property prices.

The value proposition offered by global listed property relative to local property stocks has already prompted local asset managers to increase their offshore portfolio weightings. Sesfikile Capital is in the process of establishing a dedicated fund to provide institutional investors with easy access to global property markets.

Bigger unit trust fund managers are following suit. Metropolitan is set to launch a global property-focused unit trust fund on February 1, the group’s first branded foray into offshore real estate.

“We believe global property is now a good buy but our prudential managed funds are maxed out at the 25% offshore asset allocation limit. So it made sense to establish a stand-alone offshore propertyfocused fund,’’ says Metropolitan Collective Investments CEO Robert Walton. The fund will initially be sized around R200m-R300m. Walton hopes to grow investments to R1bn within three years.

However, analysts warn that investors can no longer afford to look at global property as one generic market. Munzara says one has to become far more discerning regarding what and where you buy, as the dynamics can differ markedly from region to region and from sector to sector.

Duncan agrees, referring to the US as an example. “While the region outperformed on an overall basis last year, returns from US Reits were very sector-driven. Less cyclical sectors like regional shopping centres, self-storage and apartment funds were the winners while offices and hotels were under pressure.’’

Duncan cites Australia, Singapore, Hong Kong and the UK as the areas that offer the best buying opportunities over the next 12 months. Japan is also looking relatively cheap, following the fallout from last year’s earthquake.

Says Duncan: “We continue to favour companies with quality assets in high barrier to entry markets with good management teams and strong balance sheets.’’

Rawlins believes it’s all about timing one’s entry and exit into different markets and sectors. “We first identify the geographic areas and sectors that are likely to outperform and then target the companies and management teams with superior growth potential within those sectors and regions.’’

Rawlins expects Australia to outperform all other regions in 2012, as more Australian investors shift from money markets to Reits on the back of a declining interest rate environment.

“Specialist apartment funds in the US are also likely to continue to shine, as the demand for rented accommodation remains high, with little construction activity in the US housing market in sight.” Rawlins also likes US funds that focus on data centres, timber land owners (forestry), and selfstorage. He says US funds with exposure to shopping centres also look cheap. “Even a small increase in consumer confidence in the US will create a significant uptick in mall Reits.’’

De Goede favours Canada, among others. “Support from the resource sector bodes well for the Canadian office market while US retailers continue to enter Canada in search of new consumer markets, which will underpin retail rentals. Canadian debt funding markets also remain open.’’

The key question for investors is what’s the best way to share in the returns offered by the ongoing recovery in offshore property markets? For those investors who don’t want to take money physically out of the country through the SA Reserve Bank, the easiest option is either through the JSE or unit trust funds.

Five years ago, the JSE had only one rand-hedge contender that offered investors exposure to offshore real estate — UK shopping centre giant Liberty International. The company, founded in the 1980s by SA insurance tycoon Donald Gordon, was split into Capital & Counties Properties and Capital Shopping Centres in May 2010.

However, over the past three years some of the SA listed property sector’s biggest movers and shakers, including Redefine Properties’ Marc Wainer, Resilient group’s Des de Beer and Growthpoint Properties’ Norbert Sasse, have embarked on offshore expansion trials to Europe, Australia and the UK.

The upshot is that JSE investors now have at least six different entry points into global property: Redefine International, New Europe Property Investments, MAS Plc, Growthpoint Properties (Australia), Capital & Counties Properties and Capital Shopping Centres (see stories on pages 34-37).

Moreover, JSE investors will soon be able to share in the potential spoils offered by underdeveloped African markets. Resilient group is entering Nigeria this year, where De Beer believes he can successfully replicate the SA model of building a portfolio of dominant shopping centres in nonmetropolitan areas. “Nigeria’s population is a staggering 150m but the country is virtually untapped in terms of shopping centre supply. It’s a low-income but highvolume market and offers substantially better returns than SA, where there’s limited opportunity to build new malls.’’

Resilient will partner Group 5 and Standard Bank in Nigeria. De Beer has an initial war chest of R500m. He has already identified suitable sites for 10 malls, mostly sized between 12000m² and 14000m²

Investors who want to leave the stock selection to investment managers and gain access to a much wider universe of property counters than that available on the JSE can go the unit trust fund route.

SA has six offshore property-focused offerings to choose from: Stanlib Global Property Fund, Catalyst Global Real Estate Fund, Grindrod Global Property Income Fund, Marriott International Real Estate Fund, Oasis Crescent International Property Equity Fund and the soon to be launched Metropolitan Global Property Fund. The five existing funds last year delivered total rand returns of between 21,13% (Stanlib) and 15,56% (Oasis), according to Morningstar.

Top performer Stanlib Global Property Fund’s overweight positions include Simon Property Group (US) and Westfield Group (US), two of the biggest shopping centre owners in the world, as well as pan-European retail play Unibail-Rodamco (France) and retail fund CapitaMall (Singapore).

Keillen Ndlovu, head of Stanlib property funds, says they also like hospital funds for their highly defensive income streams. “Hospitals continue to generate cash, come rain or shine.’’

Stanlib has stakes in First Reit, which is listed in Singapore but owns mostly Indonesian hospitals; Parkway Life Reit, which owns hospitals in Singapore and retirement villages in Japan; and USbased Healthcare Reit.

Ndlovu notes these stock picks underline Stanlib’s strategy to invest in offshore property companies that have exposure to prime properties, tenant stability, balance sheet strength and strong core rental earnings. “We believe that prime property will continue to outperform across all global sectors and regions. It’s too early to start playing the secondary market.’’

Property fund managers have mixed views on the returns they are likely to achieve offshore over the next 12 months. Forecasts generally vary between 8% and 12% in US dollars. Rawlins is confident he will achieve a total return of as much as 20% (US) for Grindrod Global Property Income Fund investors. Rand weakness will add a further sweetener.

But offshore property is not entirely a one-way bet. Returns could be hammered by a stronger rand. There’s also the possibility of the world entering another recession this year and, of course, ongoing worries of eurozone debt defaults.

Last modified on Friday, 18 April 2014 17:56

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