The proverbial middle child of financial markets. This was largely how South Africa’s listed property market was viewed by punters who had a bias for equities.
In their own right, equities delivered lucrative returns. But 2002 was seen as the turning point for listed property, as it not only garnered the attention of income-chasing investors but also fund managers.
A flurry of property listings, rousing deal-making, and capital raisings followed – firmly entrenching listed property as a bellwether.
Since then, the sector has piqued the interest of many and has grown a reputation for outperforming equities (the JSE All Share Index), ten-year government bonds, and cash.
Although the sector has built a track record over the last ten years, the exposure of fund managers to the sector has been relatively low. As Grindrod Asset Management chief investment officer Ian Anderson puts it: “South African fund managers have needed to up weight their exposure to property, which has historically been very low.”
A typical balanced fund has a benchmark rating of about 5% for listed property. Momentum Asset Management head of property Nesi Chetty, says most fund managers over the last ten years were underweight on listed property at about 2.5-3%. They have now upped their listed property allocations to 4% or 5%.
More fund managers are looking to listed property for value, as equities are becoming expensive and further volatility is priced into them owing to rising interest rates around the globe and weak economic growth.
“Property is seen as a stable part of a balanced portfolio… With listed property, you are getting a decent starting yield and growth,” says Chetty. Trading at a forward yield of about 5.3%, listed property is viewed as pricey, but is at fair value when benchmarked against other asset classes.
The sector has staged a recovery over the past three months after the sacking of Nhlanhla Nene as finance minister in December sparked a wide sell-off in SA-focused property stocks. So far this year, the FTSE/JSE SA Listed Property Index has notched up a capital return of about 10%, two times the rise of bonds (5%), while equities posted 8%. The recovery of listed property was in part due to more fund managers upping their allocations into the sector.
Given the glacial pace of SA’s economic growth, a potential downgrade of the country’s credit rating and rising interest rates – making property acquisitions more expensive – the momentum of listed property might cool down. This, Grindrod’s Anderson says, will encourage those investors who are underweight to start adding to their listed property exposure.
Adrian Jardine, an equity analyst at Avior Capital Markets, supports Anderson’s views, saying the current high levels of volatility in equity markets opens up excellent and sporadic buying opportunities in listed property. “Outperformance [of the sector] will come down to market-timing ability,” Jardine tells Moneyweb.
Chetty, favours offshore developed markets such as the UK and Germany, where there are quality office and retail properties with good yields and growth prospects. He likes rand hedge plays New Europe Property Investments, which owns shopping malls in Romania; offshore-focused Rockcastle Global Real Estate; and Sirius Real Estate, which owns business parks in Germany. Chetty’s split between domestic and offshore property stocks picks is 80-20%.
At current levels, Jardine is also betting on Sirius for “management’s astute execution of its growth strategy in the attractive German property market.”
Jardine also picks UK- and Germany-focused Redefine International for its earnings potential (albeit with relatively low real distribution growth prospects) and attractive forward yield in excess of 7.3%, as well as UK shopping mall-owner Intu Properties, which at a 22% discount to net asset value makes for a compelling entry point.
Anderson still finds value in small- and medium-sized SA-focused property companies. “We continue to see significant long-term value in the SA-only listed property companies where investors can secure double-digit initial income yields and inflation-beating income and capital growth.”