Offshore real estate stocks, regarded as a safe haven during the global bear market of three years ago because of their high income yields, are being spurned by investors in favour of general equities.
Three years ago, offshore listed property stocks won this beauty contest hands down. Since then their income yields have halved to 4.5%, while dividend yields on general equities have more than doubled to 7%.
The same is not true of JSE-listed property funds, many of which still offer attractive yields of 9% or more. The reason for this is that South Africa is still in an interest rate down-cycle, while most of the rest of the world has had to raise interest rates to curb inflationary pressures.
Many European countries are now contemplating following Sweden's recent example of lowering interest rates again, or at least capping rates at current levels. SA's benign inflation holds further scope for rate cuts in the weeks ahead, which have helped push property stocks to record highs in recent months.
Offshore it's a different story. Rising interest rates have taken some of the sheen off real estate stocks, while general equities, despite price rises of between 36% in the US and 50% in the UK since early 2003, now offer dividend yields comparable to that of the JSE.
Overseas equities now offer better returns than listed property, according to Ian Anderson, fund manager for Marriott's International Real Estate Fund and its balanced fund, the International Income Growth Fund.
"In 1999, the earnings yield on listed property in the US and the UK was 5% more than that provided by equities. The situation has now reversed, with equities delivering 2% better earnings yields in the UK than listed property," says Anderson.
Marriott recently capped its International Real Estate fund, recommending that investors switch their offshore exposure to global equities.
"This fact is remarkable considering the relative high-risk profile of equities versus listed property, but the reason is that global equities are well priced," adds Anderson.
"The earnings yields on global equities have returned to the level they were before the heady days of the late 1990s. They were 7% before this bull run, fell to 3% by 2000 when the run peaked, and are now back to 7%. This demonstrates excellent value for our investors."
Anderson says the Marriott International Income Growth Fund is now 70% weighted in equities compared with 45% two years ago. Its property weighting is 10% today, down from 30% at that time.
"Anyone who invested in international real estate before this surge in prices has done well. Our fund produced positive returns every year in spite of our local currency's volatility in the past six years.
"But we're now advising our clients to move to equities," says Anderson.
A consensus is forming that international real estate is now showing symptoms of distension.
Tony Gibson, executive chairman (international), Coronation Fund Managers, says the 20-year decline in interest rates has created a fertile environment for real estate investing.
Housing affordability has closely followed the trend in the 10-year Treasury bond yield.
The number of new houses for sale in the US for which construction has not yet begun is at an all-time high, evidence of speculation run amok.
"This is a particularly precarious situation at this juncture, since homeowners' ability to meet their mortgage obligations is alarmingly stretched with a high ratio of mortgage debt to homeowners' equity," says Gibson.
Business Times
Publisher: Business Times
Source: Inet Bridge
