There are three reasons why you are certain to make good money by investing in the listed property sector. "It's a no-brainer," says Andre Stadler, MD of listed fund manager Catalyst. Here's why:

By a quirk of investment thinking, fund managers treat listed property investment, with its predictable income stream, as a proxy for long-dated debt like the 10-year R157. So when the interest rates rise, the price goes down to give investors a higher yield in line with the rate increase. For instance, at the end of September, Growthpoint, with a 8,4% forward yield (91,5c payout in 2007) was R10,90/share, but if the interest rates rise by another 1,5 percentage points by April, the yield could rise to 9,5% and the price drop to R9,53.

The big point for long-term investors is that the actual income doesn't go down with higher interest rates like, say, retailers, whose customers buy less. Growthpoint's payout will not be affected by the interest rates, as most of its debt is fixed. It's certain that interest rates will fall and the prices will go up again. When the rates eventually drop by, say, 3%, the forward yield drops to, say, 7% and the price rises to R13,07. It might take a year or so to get there but everybody knows it will happen.

The commercial property sector is in the first phase of a long-term boom. Retail, office and industrial rents are rising. SA's rents have trailed the rest of the world's for decades. Prime office rents are about R120/m? against an average of at least double that in similar countries like Australia, Argentina and Spain. Growthpoint payouts are likely to continue growing in double digits until SA rents catch up with their peers. So a further 12% rise in payout in each of two years, to 114,8c by 2009, will push the price at a 7% yield to R16,40. But it gets better.

The fast-globalising property market is about to hit SA. Only 2% of the JSE's R65,5bn listed property sector - R1,3bn - is foreign- owned compared with between 10% and 50% on the rest of the JSE. According to global real estate company Jones Lang Lasalle, cross-border property investment increased 30% in the first six months of 2006 to US$290bn (R1,2 trillion). The purchase of the Victoria & Alfred Waterfront in Cape Town last month was not just a flash in the pan.

"Australia is a good example," says Stadler. "Foreign investment has grown from 4% of the Aussie property sector three years ago to between 15% and 20%."

SA listed property, at $8bn, is too small. "But smaller funds will start investing," says Stadler.

That will put downward pressure on fund yields as SA gets into line with global yield averages. Currently, property yields are just under the yield on 10-year bonds. Global property yields are on average 12% below global 10-year bond rates. If foreign investment drives our listed sector to, say, one percentage point below 10-year bonds, that would push Growthpoint's yield to 6,35% and its price to R18 in 2009 - nearly double its price today.

Stadler's right, it's a no-brainer.

Financial Mail
Publisher: I-Net Bridge
Source: I-Net Bridge