Approximately R226bn of equity has been raised in the listed property sector since 2010, the bulk of which has been raised (90%) through secondary equity raisings as opposed to primary equity raisings (10%). This may seem perplexing given the spate of new listings over the last six years. It is, however, largely explained by the fact that the majority of listed property companies in South Africa distribute c. 100% of their distributable earnings and are therefore required to raise additional equity to fund acquisitions. The total equity raised in 2016 was c. R26bn, which is significantly less than the equity raised in 2014 and 2015.
* Primary equity raised refers to new listings
** Secondary equity raised refers to rights offers, bookbuilds and dividend re-investments (excluding for dual listed companies)
Asset class total returns – 2016
Bonds were the best performing asset class in 2016, delivering a total return of 15.45%, followed by listed property (10.20%), cash (7.50%) and equities (2.63%).
The performance of listed property and other asset classes were impacted by a number of major events (both local and international) which unfolded in 2016. These events include, inter alia, the outcome of the Brexit vote; the outcome of the local municipal election; the saga between the NPA and the Minister of Finance; the outcome of the US presidential election and the decision by Fitch, S&P and Moody’s with regards to South Africa’s sovereign rating.
Asset class total returns, standard deviation and risk adjusted returns over different time periods
Listed property has delivered the highest return by some margin over a 3, 5, 10 and 15-year period as illustrated in the graph below.
Listed property has been more volatile than equities and bonds over the selected time periods (1, 3, 5, 10 and 15 years) as illustrated below. It is interesting to note that the spread between the volatility of listed property and equities has increased over time. This could potentially be attributed to, inter alia, the increasing international exposure of the constituents of the J253 index over time.
Listed property however still stacks up favourably in comparison to equities and bonds, on a risk adjusted basis, over different time periods (with the exception over the last 12 months) as illustrated below.
Total return of J253 constituents in 2016
The total return of the underlying constituents of the J253 index ranged from -32.08% for Stenprop Limited to +32.19% for SA Corporate, illustrating the importance of stock selection within the sector.
Volatility of J253 constituents in 2016
There was also a fairly wide divergence in the volatility of the underlying returns of the constituents of the J253 constituents as is illustrated in the graph below.
*EPP only listed during September 2016
Cross counter correlations of constituents of the J253 index
Redefine, Hyprop, Attacq and Resilient had the highest positive correlation to the J253 index whereas MSP, EPP and STP had a negative correlation to the J253 index. In addition, it is evident from the correlation matrix below that the correlation between constituents of the J253 index varies significantly – in some instances strong positive correlation and in other instances strong negative correlation.
Asset class correlations over different time periods
Listed property is more highly correlated to bonds than equities, especially over longer time periods. The relationship between listed property and equities has however been stronger than the relationship between listed property and bonds over the last 12 months.
Benefits of including listed property in a balanced portfolio over different time periods
Listed property has been the best performing asset class over a 3, 5, 10 and 15-year period. Furthermore, listed property has a low correlation to equities and semi-strong (but not perfect) correlation to bonds over longer time periods. Therefore, it is not surprising that adding listed property to a balanced portfolio has the potential to increase risk adjusted returns over different time periods. The graph below illustrates the benefit of adding different proportions of listed property to a balanced portfolio.
The assumptions of the model are as follows:
- balanced portfolio initially weighted as follows: 60% to equities, 30% to bonds and 10% to cash.
- thereafter listed property is added to the balanced portfolio in increments of 1%. The exposure to equities, bonds and cash reduce in proportion to their original weightings (i.e. equities by 0.6%, bonds by 0.3% and cash by 0.1%)
- portfolio is rebalanced to original weighting every 3 months.
Craig Smith is head of research, Wynand Smit is a research analyst and Rael Colley a research analyst at Anchor Securities Stockbrokers.