Shorting SA Listed Property

Posted On Friday, 08 August 2008 02:00 Published by eProp Commercial Property News
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Madison pose the question: Is the listed property sector being used like an ATM by investors shorting to purchase commodities?

Property-Housing-ResidentialAndre van der Veer - RMB Proprietary Trading & Investments - responds:

Selling a stock short in the market implies that you intend to repurchase it cheaper, or at the same price, that you sold it in order to turn a profit. To do this, one needs to be confident of further price falls from the level one originally sold at, or at least that the same price level will hold over a longer period of time. Theoretically at least, the money that one is raising by selling short is a lot cheaper than going to the bank and borrowing an equivalent amount.

The dynamic ultimately has to do with the cost of capital, which is then deployed in other sectors, such as resources at the moment, which are outperforming the market in general.

Selecting the property sector highlights the fact that it was richly priced six months ago and as such had little chance of becoming even more keenley priced.

When analyzing all the fundamentals - vacancies, rental increases, the overall slowdown in economy, availability of commercial property to be purchased by PUT and PLS, etc – there are no evident catalysts that present a price risk to valuation on the upside. It is highly unlikely that the entire sector will be rerated by a further (from already expensive market valuations) 20% over the next 6 months. In fact it is more likely that the stocks will become cheaper with cash offering interest returns of 13% in comparison to listed property’s dividends of around 7%.

Contrast that against stocks such as MTN, Anglo, Billiton, Sasol or any one of the coal or steel stocks, where the future performance seems less predictable. A takeover at MTN, coal and oil prices: who knows what will happen? In these shares, slight changes in the commodity market prices change company earnings materially.

Thus, in the current market it makes sense to borrow against the property sector through the sheer predictability of revenue streams. It represents a cheap withdrawal with little risk on upside and an investor can utilise the cash in quite a few different sectors in the current market, most likely in the commodity sector if current market preferences are anything to go by.

These actions change the price of property socks, with the market on the whole selling rather than buying and the absence of any obvious catalysts for a further rerating of already expensive property stocks.

Being cognisant of the fact that we are entering a lower growth period for the property sector during the next five years in comparison to what had been achieved during the past five years, I would expect the sector to be trading on an average of 11% - 12% forward yield.

Importantly, there is no need to be negative about the property sector; the current dynamics only mean that the sector’s out performance risk is less or in all likelihood improbable. Those who sell short are looking for a sector that won’t double from one day to the next.

Yes, the economics of such a proposition are punitive for the property sector. Yes, this may weigh down the property sector even further. Certainly if you compare long-bond rates to where the property sector yields are it seems as if property stocks have a way to go before they are fairly priced in comparison to longer dated bonds. Furthermore, looking at South African property from a global perspective and without taking account of factors such as exchange control, investors should undertake a re-think with regards to capital re-allocation. Why would you want to invest in SA property when properties in the UK offer higher returns in distribution and similar growth paths and provide a great rand and inflation hedge at half the comparable South African price?

So for the foreseeable future it indeed looks as if South African property sector counters will be treated punitively and as a low risk cash generation machine for alternative investment strategies – buyers beware!

 

Last modified on Monday, 21 April 2014 12:14

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