The rising interest rate environment in SA would have a limited effect on the income distribution coming out of the listed property sector as most listed property companies and funds had fixed the interest rates on large portions of their debt, said Catalyst Fund Managers on Tuesday.

Andre Stadler, MD of Catalyst Fund Managers, said the effect would be limited because most of the listed property funds had a "fixed profile to their debt".

"Only a limited portion of their debt will be exposed to short-term interest rate fluctuations," said Stadler.

But he said the rising interest rate environment would influence the pricing of the asset class.

"It could cause price drops, because your cash yield would become more attractive than other asset classes such as property."

As a result, listed property prices could come down and yields could go up to increase the attractiveness of the sector.

However, property yields were generally compared to long bond yields rather than short-term interest rates because they were both longer-term investments, said Stadler.

Brian Azizollahoff, CEO of listed property loan stock company Redefine Income Fund, said even with a rise in interest rates, listed property companies would not be paying out more in interest on their borrowings.

"And with property fundamentals as strong as they are, this should not affect distributions."

Azizollahoff said that generally the property sector was seen as a proxy for bonds. "And in the same way that bonds are sensitive to interest rate movements, so is property."

Until interest rate rises had come to an end, the market could expect some volatility in the listed property sector. He said there could still be price fluctuations until the end of the year.

"Investors in the listed property sector are mainly interested in income distributions. And perhaps once they see continued good performance out of the listed sector, some of that volatility may be mitigated," said Azizollahoff.

The listed property sector continued to experience pricing volatility over the quarter ended September, but still delivered a total return for this period of 9,22%, according to the latest report from Catalyst.

Stadler said the listed property sector had experienced a significant slide since its total return high of 23,14% on May 9.

Following this peak the sector lost about 25% of its value and reached its lowest point for the year on July 17, when it delivered a negative total return of -7,45% for the year to date to July 17.

Catalyst said the "cycle of increased volatility and environment of uncertainty" began in May when global equity markets, particularly emerging markets, began to experience weakness and high volatility.

"As inflation expectations rose, risk aversion increased and emerging markets experienced large sell-offs as both domestic and international investors moved to safer assets. The South African listed property sector also suffered alongside general markets," said Catalyst.

The rising local interest rate environment also added to the sector's woes.

But the sector did recover some of its losses on the back of recent solid distribution growth from its companies and funds.

Business Day
Publisher: I-Net Bridge
Source: I-Net Bridge