THE weakening bond market is the "key risk" to sustained high returns from the local listed property market, which has provided strong returns to investors over the past few years, says Investment Solutions market analyst Thobile Thukani.
Mr Thukani said on Wednesday a survey conducted by Investment Solutions early this year indicated that fund managers believed that as investors continued to look for yields, traditional equities and cash remained the most favoured asset classes, with nominal bonds and property being the least favourite.
The performance of listed property tends to track the performance of bonds as they are both income-generating investments. While Investment Solutions was still "positive" about listed property, it did not expect the "elevated returns" seen over the past few years to be sustained. The sector saw total returns last year of 36%.
The strong run was the result of "falling bond yields, emerging market flows, and a reasonable distribution growth — all of which contributed to that stellar performance".
"Property and local bond yields are negatively correlated — when bond yields fall, property tends to do well. We think that the key risk to the property market is the weakening bond market."
Mr Thukani said local bond yields had fallen to "multiyear lows, as a result of strong foreign flows". However, foreign bond flows had slowed over the past few months, and this, coupled with rising inflation, meant the chance of bond yields declining further was "very limited".
Property dividend yields were about 6.2%, while cash was yielding 5.5% — "so if you look at the current spread, property does look attractive relative to cash", said Mr Thukani.
Alternative Real Estate fund manager Maurice Shapiro said the low interest rate environment had been the "key driver" to the sector’s strong performance, however "investors also need to appreciate that the property sector only did 9% in 2011, so the return over two years is not as elevated as investors may believe".
Reserve Bank governor Gill Marcus indicated that the lower interest rate environment, which was "supportive for property", was likely to remain.
Mr Shapiro said: "Opportunities in the property sector are good with the recent real estate investment trust (Reit) legislation, so we can expect more new listings in the sector."
According to Catalyst Fund Managers’ listed property overview for March, the outlook for distribution growth this year "remains reasonable" and the sector is likely to deliver better than inflationary type growth in income distributions.
The risk to total returns in the short term was a weakening in capital markets and/or deterioration in the income growth outlook.
Source: BD
