As SA listed property yields move closer to world levels investors in listed property funds may wish to diversify their investments into foreign listed property markets - according to Andre Stadler of Catalyst Securities

LINDSAY WILLIAMS: You say that local property fundamentals are continuing to improve - you don’t think we are overbought?

ANDRE STADLER: I think there are two different issues in the market. One is what’s happening on the property fundamentals side - in terms of leasing activity, and rental levels - and the other is the yields that the sector is trading at. I think the fundamental side - the underpinning - is still coming off a fairly low base. You’re seeing a gradual pick-up in rental streams, and vacancy levels are reducing - specifically in the office market.

LINDSAY WILLIAMS: So the office market would be your pick - on the commercial side?

ANDRE STADLER: As a comeback story, yes. I think retail is the one that is at the front end of the cycle at the moment - and at some point will start to top-out as we start to overdevelop retail space. The office market is coming from the other side - where we had an oversupply of space, and were only gradually taking that up. As that supply starts to come off we will see rental levels move.

LINDSAY WILLIAMS: When you talk about the top of the rental cycle - is it because you think that people’s spending power is finally going to plateau, or do you think that finally there is more space coming onto the market, and that’s the reason for it?

ANDRE STADLER: I think we are starting to see the planning phase of that. We haven’t seen the space come on yet, but we are certainly seeing the retailers talking about fairly significant expansion of their stores and outlets. That’s usually the sign of overdevelopment of retail space. It hasn’t happened yet - and we’re still seeing very strong demand from a retail rental point of view. At some point we will overdevelop - it’s just a question of when.

LINDSAY WILLIAMS: Talking about the office market - it’s very difficult for people like us driving around the northern suburbs of Johannesburg - seeing the To Let signs - to concur with your view that the office market is set for take-off! What’s your rationale behind that?

ANDRE STADLER: I think what we are seeing is that supply is reducing - we had significant oversupply about 18 months ago, where we were sitting with vacancy levels at around 20%. What we are seeing is that dropping down to around the 10% level - so you’ve still got fairly significant supply, but in certain locations vacancy is now at 5% to 7% levels where you start to see constraints developing - people looking for fairly large footprints are not able to find that accommodation. There are lots of small pockets around - but if you want good quality accommodation you are going to battle to find it.

LINDSAY WILLIAMS: Given your opinion on this market - which companies on the JSE listed property sector catch your eye in terms of portfolio mix?

ANDRE STADLER: There are two issues. One is obviously in terms of the actual allocation - in terms of retail office or industrial. I think offices at the moment - there’s more opportunity there, in terms of growth in the income stream from the office side. Funds like Redefine, Emira - funds that have an office exposure that still has a fairly high vacancy component have a positive upside potential. Then there are funds that have relatively high historic debt funding costs - because of where interest rates have moved as those fixes on their debt unwind you are going to see significant savings in their debt funding cost side. Those are funds like Metboard - an industrial property focused fund. Industrials are improving - but it’s their debt funding costs that will ultimately benefit them in the longer term - as it comes off.

LINDSAY WILLIAMS: An article coming out in the Business Day newspaper by property correspondent Nick Wilson quotes you saying that local investors should be looking at overseas property funds. Can you explain that for us?

ANDRE STADLER: Historically the yield gap between our own sector, and for argument sake the US market that probably accounts for about 50% of the global listed property sector - has been so dramatic that it’s been questionable that the investor with an appetite for property looking for a nice income return, with growth prospects - would be able to stomach the dilution of that income yield. Two to three years ago the US market was sitting at 7% - and our yield was 13.6% - so you had quite a significant yield differential. Today that has dropped to around a 3% differential - with our yields sitting around 8.5%. Australia is sitting around 6.4%, the Netherlands is 6%, and Canada is at around 7% - so that differential is not as significant. Investors looking for a bit more global diversification - not wanting to put all their bets on the rand, and in South Africa - it’s now something that’s not as difficult to jump into from a yield point of view.

LINDSAY WILLIAMS: What would be your top geographical pick?

ANDRE STADLER: I think you’ve got to look at the markets that have gone through the move towards a structure where income is passed straight through to the investor - without it being taxed in the entity. I think a lot of the European countries at the moment are going through that process - Germany has got some things on the cards, the UK is still under discussion, and the French have just been through it. The French market has benefited dramatically - they have been the top performer in Europe this year - over the past 12 months a 48% return. That really has come about because of a move towards this structure. I think that’s where you’ve got to be looking - for those types of opportunities. It’s happening in a number of areas around the globe - in the Asian market as well. You are seeing new legislation coming out making this type of structure - which we’ve had in SA for quite a long time - possible in those markets. That’s where you are going to see some of your best performers coming through.