Listed property offering better returns

Posted On Wednesday, 26 November 2003 02:00 Published by eProp Commercial Property News
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Current listed property yields and forecast distribution growth offer attractive prospects for excess returns, says Andre Stadler, managing director of Catalyst Securities which manages portfolios for institutional investors with a combined value of R500 million.

 

Andre StadlerHe says that while property, because of its greater risk than cash or bonds, should be required to produce returns in excess of bonds, concerns relating to the strong correlation between property yields and long bonds, which could have downside risk from current levels, should be treated with caution.

Stadler says that in the United States, the yield on the US Treasury 10-year note has increased from 3.8% to 4.3% so far this year with the yield on the NAREIT Real Estate 50 Index firming from 6.5% to 5.5% over the same period .The yield differential is now 1.2% compared to a differential in South Africa of 2.8%, he adds.

“On a portfolio of the 10 largest South African listed property stocks, which  have a combined market value of R15 billion,  the weighted average historic rolled yield is some 11%. We expect compound growth in distribution of 3.5% over the next five years.

“If there is no change in the historic yield of these stocks, and the growth we anticipate materialises, the total pre-tax return would thus be 14.5% a year for five years. “

Stadler says it should be noted that the 11% historic yield was achieved in a property market which has experienced a prolonged period of weak fundamentals with relatively low occupancy levels and high interest costs which limits downside risk.

“Our forecast of 3.5% annual distribution growth is an average over the five-year period. This is below expectations for inflation despite strong increases in building costs, which could provide upside potential. The growth rate will be supported by lease escalation rates currently greater than inflation and a decline in interest costs. However, higher increases in property operating expenses and a delay in market rental growth will limit distribution growth.

“If we assume an average inflation rate of 5.5%, the real pre-tax return on listed property is 9% compared to current cash at 2.5% and bonds at 3.3%.

“This scenario ignores the prospects for a further re-rating of property stocks, which would provide significant further upside,” says Stadler.

Last modified on Friday, 09 May 2014 16:05

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