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Outlining prospects for South Africa’s property loan stock companies, Ilan Kaplan, Madison Property Fund Managers analyst, says that the consensus of market opinion sees 2007 bringing the end to the ongoing rises in interest rates.  He is, in fact, predicting a decline in the rates by the year end.

“This, of course, will be favourable for the bottom line performance of most property companies,” he adds.  The 2% rise of the last eight months, says Kaplan, has not seriously affected the performances of the major property companies because, firstly, there has been upward growth in rental levels over the same period and, secondly, most companies, including Redefine Income Fund, have taken advantage of the good conditions of the last three years to reduce their gearings to below 50% and to negotiate favourable fixed rates on outstanding debt.

The 100% purchase of Spearhead Property Holdings by Redefine, says Kaplan, is in line with a growing trend in the property sector.  Smaller companies, he predicts, will increasingly sell out to their larger colleagues.  This, he believes, is an inevitable consequence of investors looking for increased liquidity and with large portfolio companies.

“Traditionally growth was achieved by development, redevelopment and, most importantly, the purchase of new properties. However these opportunities are increasingly hard to find. One of the few alternatives, therefore, is to buy a whole company along with its entire portfolio.”  The pressure to go this route, he adds, will be increased by the swing to REITS (Real Estate Investment Trust Structure).

“One of the great advantages of REITS is that it is understood internationally and is a recognised method of attracting foreign investment.  However, international investors will show interest only in companies with more than $1 billion to $2 billion worth of property - so the drive is now on to reach these value levels.”

Most First World investors, notes Kaplan, are now able to get total returns in South Africa of 12% to 15%, i.e. returns significantly higher than in their own countries - and many, he says, are now increasingly aware of this.  However, supply constraints have prevailed – only limited numbers of shares have been available. The shortage of these shares, he believes, has been a major reason why share prices have climbed to almost “inexplicably high” levels.  (At the time of Kaplan’s comments, Madison linked units were valued at R8 per linked unit – over R4 higher than its lowest level only six months ago.)

“Even if the rand were to weaken by, say, 10%, average returns for overseas investors would still be above double digit in US Dollar terms - satisfactory by any standards,” says Kaplan.

For further information contact Ilan Kaplan on 021 425 1000.