Listed property still offers value for those with a long-term view

Posted On Tuesday, 19 September 2006 02:00 Published by eProp Commercial Property News
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The bright long-term outlook for earnings growth in South Africa’s listed property market, combined with the portfolio diversification and liquidity benefits of the sector, makes this asset class an attractive one for longer-term investors.

Property-Housing-ResidentialThis remains true despite many analysts’ expectations of a slowdown in growth compared to the heady returns of the past few years.

Traditionally regarded only as a long-term investment, recent years have seen listed property attract large inflows of shorter-term funds as speculators have capitalised on the strong gains in the sector.

Indeed, property unit trusts have posted average annual returns of around 40% per year since 2003, driven mainly by falling interest rates.

As a result of this spectacular performance, SA listed property has been accepted as an important asset class for any investment portfolio.

According to the Association of Collective Investments, assets in the property sector reached R15.6-billion as at June 30 2006 and accounted for 3.4% of the R455.3-billion in total assets in the collective investments industry, including institutional and retail funds.

When one compares this with R1.3-billion or just 1.2% of total assets in June 2001, the sector’s stellar rise in popularity is evident.

Investors now have some 24 property funds from which to choose, compared with only four in 2001. Of course, greater choice brings a need for more detailed research as the funds differ significantly in their holdings and risk profiles — so investors must be selective in their choices.

Some, like the Old Mutual SA Quoted Property Fund, offer pure exposure to the local property market by not including shares of international property groups, and limiting cash holdings to less than 5% of the fund’s value. Others may represent a wider property exposure, while the proportion of cash and bonds can vary substantially.

Since May, when rising global aversion to risk and the deteriorating inflation and interest-rate outlook prompted a sharp correction in the listed property market, investors have been wary of the sector.

Len van Niekerk, fund manager of the Old Mutual SA Quoted Property Fund, points out that although some of this correction can be justified, the extent of the sell-off was largely overdone, and made worse by aggressive selling by some fund managers and concerned individual investors.

“Shorter-term investors have exited the sector as they recognise that the days of 40% annual returns are over,” he observes, “but the longer-term market fundamentals haven’t changed. The outlook for listed property remains almost as attractive as ever, particularly for longer-term income investors.”

While the residential property sector may appear to be floundering somewhat, the fundamentals for the commercial property market have never been better.

Listed property offers investors valuable exposure to this market, which comprises retail, industrial and office properties, without the need to invest in physical property.

Demand for all three of these property categories is growing as the economy expands, ensuring that vacancies remain low or continue to decline. What’s more, supply constraints — due to rising land and building costs and stricter zoning — support a sustainable rise in rental income.

“Although there has been some deterioration in conditions in the retail environment, we do not anticipate it falling off a cliff,” Van Niekerk says.

“There is, however, a risk that poorly located and tenanted retail centres could suffer, given the amount of new retail space that has come to the market.”

Meanwhile, the industrial property market is enjoying solid growth, with rental increases of above 30% no longer uncommon. Office property rental increases are still in their early stages.

The accompanying “property clock” illustrates the current phase of South Africa’s property cycle. The positive domestic earnings cycle, which began early in 2004, should be sustainable until the end of the decade, underpinning distribution growth for listed property companies.

Van Niekerk is confident that in the longer term listed property offers growth in both yield and distributions.

“The sector now offers a forward pre-tax yield of 9%, compared to 6.5% for cash and 8.5% for bonds,” he explains, “and we are forecasting income growth of 9% to 10% per year, which means that listed property could enjoy total returns of up to 20% pre-tax over the next year. Neither cash nor bonds offer any income growth.”

However, he cautions, heightened market nervousness has increased the sector’s vulnerability to price volatility over the next few months and poses a risk to capital values.

Worse-than-expected inflation, credit extension and trade data have all increased the probability that interest rates could be increased by more than previously expected.

So while listed property may experience higher volatility over the short term as worries over interest rates linger, investors who have the patience to stay the course could be rewarded with stable growth and a reliable income stream that could also support an increase in capital value over time. 

Last modified on Monday, 05 May 2014 11:37
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