Listed property has delivered a solid performance this year, with expectations that the total returns should beat last year’s performance.

Strong underlying property fundamentals have boosted distribution growth from the sector, which has also experienced far less volatility than general equities so far this year.

The South African listed property index recorded a return of 30,73% for the year to November 28 against 28,37% the year before. Total return includes income yield and capital appreciation.

Stanlib fund manager Keillen Ndlovu says the index’s total return also outperformed the all share index by almost 10%. “It has done this with less volatility despite the period witnessing three interest rate hikes. Our forecast at the beginning of the year was an 18% total return,” says Ndlovu.

But he says the property market has been weak in the past few days, with the index losing 5,4% since the record high of 385,66 on November 7. “This is entirely attributable to the long bonds derating 8% to 8,5% from the beginning of November, pricing in a rate hike in December. Though property is coming off a high base, the outlook is still positive.

“We are forecasting total returns in the lower double-digit levels for the next 12 months,” says Ndlovu. However, “the risk remains in what happens to long bonds”.

The performance of listed property tends to track that of long bonds because they are both income generating investments.

Macquarie First South property analyst Leon Allison says what is “noteworthy” is the relatively low volatility of the listed property sector this year compared with general equities. Allison says the volatility measured by the average standard deviation of returns a day has been 0,67% for listed property as opposed to 1,18% for the overall market.

“The property fundamentals continue to be strong as reflected in double-digit distribution growth from the listed property sector. The sector still attracts significant capital from investors,” he says.

Paul Duncan, investment manager at Catalyst Fund Managers, says the listed property sector’s strong performance has “historically been driven by income growth and listed property yield rerating”.

“I think the major driver of total return going forward will be income growth,” Duncan says.

He says there is less scope for significant further yield rerating. “Property fundamentals are strong, and that’s what drives income growth being delivered by listed property companies.”

Duncan says while it appears that this year’s total return performance should be better than last year’s, there is still uncertainty on inflation and interest rate expectations. There is also general global market uncertainty, which means all markets , including the listed property sector, could see some “volatility in the short term”.

Anton de Goede, investment analyst at Investec Property Investments, says the listed property sector has recently been supported by demand from institutional investors which are recognising the potential of the asset class as a separate investment allocation. “This is reflected in the less volatile trading in the listed property sector over the past two months.

“The underlying drivers in terms of direct property include the office and industrial property markets with scarcity of land and higher rentals on renewal being key,” says De Goede.

Investec Property Investments expects retail property to continue to perform at a slower pace due to the potential effect of higher interest rates on retail spend. But offices and industrial property should still achieve double digit returns, which will be the key drivers of distribution growth in the listed property sector, says De Goede.