Investors continue to pile back into the JSE's real estate sector following the major sell-off between May and August last year, which drove share prices of some funds up by more than 40% in first quarter 2007.
The strong up-tick in demand for listed property stock in recent months has surprised even the most bullish of industry commentators. And it seems that there's more to come, particularly if international punters start entering South Africa's high yielding listed property sector.

The better-than-expected performance of property stocks since January has already prompted one analyst to upgrade his growth forecasts. Macquarie First South Securities property analyst Leon Allison last week changed his outlook for listed property from neutral to outperform. He expects continued strong inflows into the sector over the next three years - not least from foreign investors, given that healthy property fundamentals such as low vacancies and new supply constraints should persist until at least 2010.

Allison forecasts total returns of 16% over the next 12 months and 34% in the next 24 months (cumulatively). His distribution growth forecast is up from 10,6% to 12,7% and in year two from 9,6% to 11%.

Allison's top pick is sector heavyweight Growthpoint, which he estimates will deliver total returns of 29% over the next 12 months. Other stocks likely to outperform over the next 12 months include Emira (23%), Hyprop (18%), Hospitality B (18%) and Sycom (18%). Allison concedes that his forecasts may be on the conservative side. More so if offshore fund managers start entering the fray on a meaningful scale this year.

Allison says while foreigners own between 20% and 50% of many of the general equity sectors on the JSE, less than 5% of listed property is in foreign hands. That scenario could change markedly if SA's listed property sector manages to secure a spot in the high profile FTSE EPRA/NAREIT global real estate index later this year. Apparently, EPRA/NAREIT researchers will vote in June on whether to include several new countries in those indexes, including SA.

Allison says SA has a good chance to be included in the global benchmarks, given that international research surveys - such as the Jones Lang Lasalle Real Estate Transparency index - last year rated SA 13th out of 56 countries in terms of transparency. SA is rated better than 15 countries (more than half) that are already included in the EPRA/NAREIT index.

Allison says SA remains one of the world's most attractive markets in terms of income, as it offers higher yields than any of its international counterparts.

Mike Flax, director of Madison Property Fund Managers, echoes this sentiment. He says there's no doubt that international asset managers are starting to sit up and take notice of SA's high-yielding listed property stocks as the global search for income yield intensifies.

Major asset managers have in fact already hit town in search of relatively high yielding listed property shares. Says Flax: "Companies such as Cadillac Fairview of Canada, CSFB, Henderson's Global, Franklin Templeton and other well-known players in the listed real estate space have started to dip their toes in the water and are looking at building sizeable stakes in the larger, more liquid, SA property stocks." These include the likes of Growthpoint, Hyprop and Redefine.

Apart from the expected inflow of money from investors overseas, share prices of property stocks will be further supported by ongoing corporate activity. André Stadler, MD of Catalyst Fund Managers, says proposed takeover deals such as that between the PIC and Cape-based CBS create huge demand pressure.

If CBS shareholders accept PIC's cash offer of R12/share, some R1,6bn in cash will need to be reinvested in other property stocks. Stadler says PIC's takeover bid has already buoyed the share price of CBS, which delivered total returns of 30% in first quarter 2007 compared to the index's total return of 16%.

Other top performers in the year to date were Hospitality B and ApexHi C (see report page 46). Both fetched total returns of 51%. Stadler says the main performance driver of Hospitality B and ApexHi C was the expectation of higher than anticipated distribution growth, underpinned by relatively high gearing.

According to Catalyst figures, the worst performers in first quarter 2007 were Calulo (-0,54%), Siyathenga (2,26%) and ApexHi B (4,8%).