The recent reaction of holders of shares in property loan stocks to the 50 base point rise in interest rates has been excessive and irrational, says Ilan Kaplan, the analyst and acquisitions strategist at Spearhead Property Holdings. 

Quoting Mariette Warner of Stanlib, Kaplan said that between 1994 and 1998, when interest rates rose from 15 to 25% the value of listed property stock fell by 44%.  In the last two months, he said, the comparatively modest 0,5% increase in the interest rates had resulted in a 25% drop in the same index’s value over only a six week period.  

“Even if there is another 100 base points rise in the rates,” said Kaplan, “this would not justify the overselling that we have seen recently.”

Asked to give reasons for his confidence in property stocks Kaplan said that the fundamentals in this sector all now look good and that recent share declines were no more than a technical correction in what is a long term Bull market.  .

“Rentals of commercial space have moved up 15 to 20% in the last year and are set to rise further in the coming year because vacancies in most CBD and major retail offices are now under 4%.  Furthermore, ongoing demand and upgrading of B-Grade commercial property will see the gap between A and B-Grade rentals closing.

“Today,” said Kaplan, “you can earn R60 per m2 for B-Grade offices and R120 per m2 for A-Grade offices.  It seems inevitable that the B-Grade space will now increase over the next year to around R80 per m2.”

 On the industrial side a similar spectacular improvement in rentals had been witnessed for some nine months now, said Kaplan, while on the retail side, which had had a very good run, a slow down in growth can be expected but investment here still remains a good proposition.

What lessons for the investor are to be learned from this?

“The message investors should be getting,” says Kaplan, “is that now is the time to put together property loan stock portfolios as, indeed, certain major fund managers are already doing.

“The stocks here are currently trading at the largest premium to bonds seen over the past 18 months and a correction is very definitely due.  If bought now several of these shares will give a return of over 10% making it possible for the first time in a long while to more than cover the funding and finance costs.”

Kaplan added that the interest rate rise had, in his view, been necessary to dampen the overspending that had recently been prevalent, particularly among the less affluent middle class who should be saving far more and who have in some cases been reckless in taking on too much debt. 

 “One way of avoiding this danger,” said Kaplan, “could be to allow people to invest a larger portion of their salaries in pension funds.  In Australia, I am told, it is now possible to invest up to 100% of your income in a pension fund.  If we adopted similar methods people’s liquidity and spending power would no doubt be reduced, which right now would be a good thing.”

– ILAN KAPLAN

For further information contact Ilan Kaplan on 021 425 1000.