The yield to maturity (YTM) on the Long Term Government Bond Index was relatively flat during the month closing at 8.24% (8.28% - 30th June 2015). The listed property historic yield for the 38 property companies, Catalyst Fund Managers report data on, ended the month at 5.67%. Excluding non-income distributors (Pivotal, Attacq) and 100% offshore earnings focused companies (New European Property Fund, Rockcastle, Redefine International and Investec Australia) the market cap weighted historic yield of the remaining companies is 6.37%.
SA Listed Property recorded the highest total return (5.14%) for the month. SA Bonds (1.04%), SA Cash (0.53%) and SA Equities (0.52%) were the next best performing asset classes. For the last 12 months SA Listed Property has recorded the highest total return (31.00%), followed by SA Bonds (8.23%), SA Cash (6.31%) and SA Equities (4.37%). For some time now we have been commenting that Real Estate fundamentals in South Africa remain challenging, but strong capital markets and lower yields for longer have been suppor been diversifying their portfolios offshore in an effort to access stronger real estate fundamentals and attractive yield versus interest cost spreads.
Follwing Tower Property Fund’s announcement last month of their first offshore investment via an acquisition in Croatia. Attaq, with Atterbury, are also heading offshore by acquiring two retail assets in Cyprus. Rebosis (via New Frontiers) and Texton continue to aggressively pursue opportunities in the UK. Although we understand the investment case we remain cautious of South African centric property companies and management teams investing offshore.
The month also saw one of the longest standing property counters, Fountainhead Property Trust, receiving shareholder approval to be taken over by Redefine who was the majority shareholder in the firm Accelerate Property Fund will take the place of Fountainhead in the SA Listed property index (SAPY).
Capital Property Fund has unconditionally resolved to spin-off its office portfolio as a newly-established stand-alone REIT. In addition Fortress has given notice of its firm intention to offer to acquire all the issued shares of Capital that Fortress does not already own in exchange for Fortress A shares and Fortress B shares, by scheme of arrangement at a swap ratio of 0.31750 Fortress A and 0.31750 Fortress B shares for each Capital share.
In the short term, listed real estate pricing is likely to take its direction from capital markets rather than real estate fundamentals, earnings and earnings growth. Over the long term, real estate fundamentals, earnings and earnings growth will drive performance.
US 2015 first half results have been largely positive supported by sound real estate fundamentals. The storage names were the strongest with hotels being the weakest. A number of the hotel companies reduced their forecasts for Revenue per Available Room (RevPar) numbers which resulted in softness in this sector. On the whole for commercial real estate across the US we expect new supply to remain limited and demand to continue as the economy improves. In Asia the weakness in China, increased Visa regulations and a reduction in luxury goods gifting continued to negatively impact retail sales in Hong Kong. An oversupply of offices remain a concern in Singapore with the opposite being true in Hong Kong where supply is constrained and demand continues. Strengthening European bonds as well as a partial resolution on Greece provided the underpin for solid returns in Europe.
Listed real estate currently trades at an estimated forward FAD (Funds Available for Distribution) yield of 4.79%, which for a long term investor still appears attractive given where current 10 year government bonds are and the current growth environment. As bond yields move out we expect some volatility in the short term but the real estate sector is pricing this in.
