Economic pressures in store for listed property in South Africa

Posted On Wednesday, 21 October 2015 13:09 Published by
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South African listed property holds its own compared with other global regions so far this year but economic pressures are set to bring volatility to bear on property markets worldwide.

Keillen Ndlovu

South African listed property has held its own compared with other global regions so far this year but economic pressures — including a likely interest rate hike in the US before next year — are set to bring volatility to bear on property markets worldwide.

An interest rate hike would see bond yields rise, pushing down bond prices. Listed property prices tend to track bonds as both are income-generating investments.

Listed property has run hard in SA over the past few years but a sluggish South African economy and a weak rand are set to put the fast-growing sector under increasing pressure.

According to Catalyst Fund Managers’ Global Listed Property Review for September, the South African Listed Property index achieved a 13.26% total rand return in the first nine months of this year. North American property managed a 14.48% return, Australia 14.1%, Europe a staggering 27.92% and a world average of 15.43%.

Fortress Income Fund was the best performing South African listed property stock during this period. Led by CEO Mark Stevens, the company, which buys shopping centres in commuter areas such as near taxi ranks, saw its B-unit return 86.30%, largely thanks to strong income payout growth.

Property company returns are composed of share price appreciation and distributions. Fortress achieved distribution earnings growth of just more than 20% in its financial year to June. The company is set to complete the takeover of Capital Property Fund, an industrial specialist, before the end of the year, creating a listed powerhouse. This could further boost Fortress’s share price.

South African listed property overall could see its returns ease before the end of the year. Commentators at a global real estate conference held by Bank of America Merrill Lynch last week said the market had priced in the first interest rate hike by the US in more than a decade.

“The US property markets seem to have priced in potential Fed (Federal Reserve System) interest rate hikes. There will be volatility running up to the first interest rate hike,” said Stanlib’s head of listed property funds, Keillen Ndlovu. He said, however, that the US economy was strong and its property market, in terms of activity on the ground, had not been affected by the volatility in global markets.

This could mean the Fed interest hike would not happen this year, according to Sam Zell, Equity Group Investments chairman and business magnate, who was against the consensus that a hike was imminent. He said the US dollar was too strong for a Fed interest rate hike.

“The single biggest thing right now is currency issues around the world. There is no need for interest rate hikes in the US now given the strength of the dollar. The US is the best economy in the world right now,” Mr Zell said.

He believed American real estate investment trusts would not be affected by a slowdown in Chinese economic activity, however. China’s economic growth dipped below 7% for the first time since 2009, growing 6.9% in the quarter between July and September compared with a year ago, its National Bureau of Statistics reported.

The Fed has forecast that the US economy will grow at 2% or less this year. SA’s Reserve Bank sees SA’s economy mustering only 1.5%. Looking at other markets, Mr Ndlovu said the UK and Europe were still attractive areas for South African investors. “The UK continues to experience good demand and rental growth. Europe is improving and is seeing the benefits of quantitative easing,” he said.

Last modified on Wednesday, 21 October 2015 14:31

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