Short-term risks dampen listed property sector

Posted On Wednesday, 13 November 2013 12:55 Published by
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There was very little in the way of positive news for investors in South Africa's listed property sector for the week ended 9 November 2013 and the US jobs report of last Friday has placed the sector firmly on the back foot.

Ian AndersonEven before the better-than-expected jobs report sent US bond yields soaring, the prices of listed property stocks in South Africa had fallen in response to a weaker Rand. The vast majority of South Africa's Real Estate Investment Trusts (SA REITs) posted price declines last week, with only Hyprop among the heavyweights able to register a price gain. The sector as a whole declined 1.5%, as Growthpoint Properties declined 1% and Redefine Properties declined 1.8%.

Rebosis Property Fund reported a 7.6% increase in distributions for the year ended 31 August 2013, in line with market expectations. Growth would have been higher but for delays in the transfer of certain acquired properties. Management is forecasting distribution growth of between 5.5% and 7.5%, which is likely to come in below the sector average and justify a discounted rating for the company.

Rebosis is trading at a significant discount to the sector as a whole (8.9% yield versus 7.4% for the sector). This has been attributed to concerns about the company's largest asset, Hemingways Mall in East London, and expectations that the company will fund its rapid growth with further equity issuance, creating an overhang of shares. Despite these concerns, Rebosis appears to offer significant relative value at current levels.

Redefine International plc laid out plans to internalise the company's external management function, thereby allowing the company to apply for UK-REIT status. The conversion to a UK-REIT should be viewed as positive for investors, as it is the preferred structure for publicly traded real estate companies and this should help broaden the company's shareholder base.

Delta Property Fund announced acquisitions totalling R1 billion. According to management, the acquisitions provide an opportunity to further diversify Delta's geographic spread into Mpumalanga and offer redevelopment opportunities, which may lead to further value accretion for unitholders. Like Rebosis, Delta currently trades on a yield significantly above the sector average, despite offering the prospect of higher distribution growth in the medium term. Delta therefore also appears to offer relative value at current levels.

Friday's US jobs report highlighted a key risk to South Africa's listed property sector in the short term. If the US Federal Reserve starts tapering its bond purchase programme next year, global bond yields will rise appreciably. With listed property in South Africa still priced and valued on a yield-relative basis, higher bond yields will result in lower listed property prices. Despite the obvious short-term threat, the sector is expected to produce distribution growth in excess of 7% per annum over the next three years. It should also produce returns that comfortably outstrip the bond market.

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