The listed property sector, which has generally released sterling results in the past month, is expected to continue delivering double-digit distribution growth over the next year on the back of strong property fundamentals.
The listed property sector experienced a torrid few months following a large sell-off from May as emerging market jitters and higher local interest rates created panic in the market.
Solid results from the sector have done much to restore confidence in the market. After losing about 25% of its value since May the sector, in the past few weeks, has recovered about 15% of its value.
Listed property as an investment class still appears attractive relative to bonds and cash.
Macquarie First South property analyst Leon Allison says the earnings growth from the listed property sector has tended to "surprise on the upside in recent weeks".
Allison says he is expecting 10% distribution growth on average from the sector in the next 12-24 months.
He says bonds earn a fixed income for investors, while cash can only earn more for investors if interest rates increase.
"One carries a bit more risk with listed property but one is compensated with the growth one receives," says Allison.
He says the 10% distribution growth from listed property will deliver a yield of about 8,7% in a year?s time, increasing to 9,5% in two years.
"We believe it is a solid investment but the easy money has been made following the sharp sell-off from May to July," says Allison.
Angelique de Rauville, MD of Investec Listed Property Investments, believes the market will see earnings growth of 12%-14% this year.
De Rauville says she is also expecting earnings growth of between 10% and 12% next year.
"So we remain bullish on the back of very strong property fundamentals. Superior earnings growth is being achieved as a result of meaningful upward reversions in rentals, operational costs being contained and a reduction in financing costs," she says.
Upward reversions mean that every time a lease expires the rental paid is renewed at significantly higher levels than historically paid.
As for the reduction in financing costs, she says even in an increasing interest rate environment, lower margins on loans and the introduction of debt securitisation programmes in the listed property sector, are contributing towards a reduction in financing costs on "geared property stocks".
De Rauville says listed property is trading at 8,25% on a 12-month forward yield which is lower, and therefore more expensive, than long bonds.
"However, we believe this is justified given earnings growth and therefore share price appreciation that can be had out of an investment into listed property. Your 8,25% yield in the first year will be in excess of 9% in year two of your investment."
Ndabe Mkhize, investment analyst at Coronation Fund Managers, says he is expecting strong growth in distributions from the listed property sector over the next two years.
But Mkhize says this "only half the equation".
"On a total return basis - that is taking capital growth into account - I do not expect total property returns per annum to be better than cash returns of 9,1%," he says.
Business Day
Publisher: I-Net Bridge
Source: I-Net Bridge
