Listed property loan-stock companies want a positive rerating

Posted On Friday, 06 June 2003 02:00 Published by eProp Commercial Property News
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WHILE some of the better performing listed property loan-stock companies believe that there is room for a positive rerating, commentators say that this has already taken place and if there is another it will be small.

Mike FlaxThe share prices of listed property companies are directly linked to rerating. Companies pushing for a positive rerating are hoping their share price will go up and their yields will come down.

Spearhead Properties CEO Mike Flax says that with lower interest rates now almost a certainty, a rerating of the better performing property loan-stock companies is long overdue.

"Investors have in the past year become uncomfortably aware that SA property loan-stock companies have very different levels of performance they are by no means all the same," says Flax.

Many companies are hamstrung by inefficient financial structures with too many deferred units diluting earnings a share and handicapping income growth. Others invest in the wrong property portfolios or over-borrow.

Flax says that Spearhead's share price growth (46% in the past year) and earnings-a-unit growth (95% in the past year) are well ahead of the sector average.

"With the lower interest rates we could, therefore, see our shares scaling new peaks before the end of this year," he says.

Flax says that all indicators now point to a sustained bull run in the better property loan-stock companies for at least two years.

Norbert Sasse, head of property fund and asset management for Investec Property Group, which will manage the merged loan-stock companies Primegro and Growthpoint, says there could be scope for a further rerating.

Investec Property Group announced last week that Primegro and Growthpoint would merge to become the single largest property company on the JSE Securities Exchange SA. The merged Growthpoint, with combined assets of R5bn and a market capitalisation of R3bn, will place the company within the top 50 on the JSE

 Sasse says there has already been a rerating of the property loan-stock and property unit trusts sectors in the past six to nine months. "In our view, that was more a question of yields on the long bond coming down quite a bit and listed property not really following quite immediately."

 Sasse says the gap between the average yield offered in the property unit trusts and property loanstock sectors has narrowed a bit to come closer to where the long bonds are trading.

He says that over the past couple of weeks, yields on long bonds which take into account changes in interest rates have come down even further.

Properties are long-term investments and follow long bonds. If the yield on long bonds goes down in anticipation of an interest rate cut, the price of the bond goes up. Therefore the same principle applies to property loan-stock companies and property unit trusts.

Government long bonds are government-issued debt over a number of years. A long bond is the best indicator of what you can earn on a risk-free investment. Investors wanting to take more of a risk and receive a better return in the listed property sector use it as a yardstick.

James Templeton, property analyst for Barnard Jacobs Mellet, views the merger as positive and says he expects Growthpoint to rerate from its current rolling forward dividend yield of 12,8% to between 11,5% and 11%.

"Should this rerating take place, the unit could currently be worth between 606c per unit and 632c per unit ," Templeton says. 

Len van Niekerk, property analyst for SCMB Securities, agrees that there has already been a rerate in the property loan-stock sector.

"There may be room for another rerate, but it won't be much," Van Niekerk says.

Atlas Properties chairman Peter Irvine says he believes that its current share price is correct.

"We don't support the view that there'll be a positive rerate for loanstock companies or property unit trusts in the foreseeable future, save for individual cases which are reviewed on merit, and if the underlying properties and income growth support the rerating," he says.

Last modified on Monday, 05 May 2014 09:51

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