Listed property performs in spite of volatility in the sector

Posted On Wednesday, 30 July 2014 13:37 Published by
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Though equities outperformed the listed property sector as an asset class, Stanlib's head of property funds, Keillen Ndlovu, gives a compelling reasons to include listed property in investors' portfolios.

Keillen Ndlovu

To illustrate his point and drive a message home about property investment, Mr Ndlovu found inspiration in a Hebrew proverb: "He is not a full man who does not own a piece of land."  South African listed property delivered total returns of 8.4% last year, outperforming bonds and cash. Bonds returned a mere 0.6% and cash 5.2%. But, last year equities outperformed listed property for the first time since 2009, with a 21.4% total return, more than double the sector's 8.4%.

Over the past 15 years, listed property has outperformed bonds by 13.3% a year, a direct result of the asset class's ability to produce inflation-beating income growth. In his presentation at the IPD SA conference last week, Mr Ndlovu noted that listed property performed to market expectations despite an "extremely" volatile year for the sector, and produced income returns of 6.8% and capital returns of 1.6%.

Listed property is the top performer of the four traditional asset classes over the past 15 years, outperforming equities by 6.4% a year. SA's listed property market capitalisation has grown more than 10 times in the last 10 years to more than R250bn. Mr Ndlovu maintains there is a place for listed property in investment portfolios, more so over cash and bonds. He says listed property offers growing income, whereas cash and bonds do not.

"This is one of the major reasons listed property has outperformed cash and bonds over time and we expect this trend to continue in the medium to long term." Last year was a difficult one for the listed property sector up to mid-May, by which time listed property had delivered total returns of 21% for the year. But the US Federal Reserve's announcement of tapering quantitative easing triggered volatility across all emerging markets, and most interest rate-sensitive instruments.

The sector's gains were quickly eroded, resulting in bonds weakening dramatically. The rand was not spared either. There is a close relation between movements in bond yields and listed property. Mr Ndlovu says the local sector's physical property fundamentals remain solid, with 53% exposure in retail, 28% in offices, 15% industrial, 2% hotels and 1% residential.

"The listed property sector is starting to experience increasing exposure in the residential property space, which has huge growth potential. We are also starting a trend in residential property funds listings on the local board," he says. After touring a number of properties with landlords locally and internationally, Mr Ndlovu says the fundamentals have not changed in listed property.

"Fundamentals remain strong, with vacancies stable. Shopping centres delivered positive turnover growth. Listed property companies continued to deliver distribution growth that met expectations and, in some instances, even higher than analysts' forecasts.

"The listed property sector continues to raise astounding sums in a tepid market. The sector raised more equity than in previous years about R18bn last year, more than R11bn raised in 2012 and R16bn in 2011. All existing real estate investment trusts were able raise the equity they required.

He says the industrial market has shifted to warehouses, logistics or distribution centres, which is where growth is taking place while new retail developments are continuing to be developed and coming on stream in the next few years.

While international retailers and shopping owners are worried about online retail, which affects retailers and landlords alike, Mr Ndlovu says South African online retail sales are immaterial at the moment.

While the office space sector is still experiencing slightly higher vacancies due to the oversupply of Bgrade and C-grade offices, he says the country's skyline is changing as companies move their head offices to new buildings.

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