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JSE-listed property returns extend losses for June

Due to volatility in the global bond market.
Correction of the listed property market cools down rally.

The unprecedented run of the FTSE/JSE South African listed property index (Sapy) over many years is seemingly slowing down, as the more than R500 billion real estate sector continues to extend losses.

For the month of June, the Sapy index delivered a negative total return of 0.4%, following the previous month’s drag of 5.9%.

The losing streak of the sector started in May as the Sapy index delivered its first negative return since May last year. The index since then has lost more than 8% of its value.

Despite the slowdown, listed property comfortably outperformed the FTSE/JSE All share Index (Alsi), which saw total returns decline by 0.8%. All bonds pulled back by 0.3% for the period under review.

Bond yields continue to rise, which has pushed listed property prices down. The listed property sector and bond yields generally trend together over the long term. 

Old Mutual Investment senior portfolio manager Evan Robins said the negative return of the sector was predominantly a result of the sell-off in bonds. In June, the ten-year bond yields increased by 15 basis points.

Robins said global macroeconomic factors are still at play for bonds but to a much lesser extent than in May.

In May the market expected the US Federal Reserve to raise interest rates for the first time in nearly ten years. But the Fed kept rates on hold. Also, bond yields were tracking Greece debt talks, as there were signs that the country would default on its debt repayments.  

Stanlib’s head of listed property funds Keillen Ndlovu said the volatility in global bond markets is likely to continue in the short term and “is likely to spill over to the listed property market”.

On a year-to-date basis (January to June), total returns (including dividends) for listed property are still positive at 6.6%, still trumping cash, the Alsi and bonds. See graph below.

Sapy index graph

Source: I-Net Bridge June 30, 2015

On the sector’s correction in May, Ndlovu said there were signs that the market was starting to look expensive.

“There was an anomaly in April. Property prices continued to go up when bond yields were going up. Normally when bond yields go up, property prices come down,” he said. In mid-April, the Sapy index recorded its peak of 9%.

The listed property sector has been resilient despite difficult global and domestic pressures. South Africa’s economic growth is expected to flake at 2% for 2015 and interest rates are expected to rise in the second half of the year.

Just in 2014, the Sapy index delivered a 26.6% total return (including dividends), surpassing the Alsi, which only returned 10.9%.

“The listed property market’s strong price growth was driven by increased appetite from both retail and institutional investors,” Ndlovu said.

Even in the face of the Sapy index decline, listed property companies continue to report strong earnings. Counters such as Arrowhead Properties, Vukile Property Fund, Delta Property Fund and Investec Property Fund reported distribution growth – earnings criteria shareholders largely use to rate property companies – north of 7%.

Some listed property counters are bucking the trend despite difficult trading conditions. Figures from Meago Asset Managers suggest that retail-focused Fortress Income Fund’s (Fortress) B-unit is the top performer so far this year, netting total returns of 47%. Fortress is followed by Hyprop Investments (+27%) and New Europe Property Investments (+22.8%).

Fortress B-unit was also the best performer for 2014, returning 100% for investors.

Not all property stocks have created value and money for shareholders. Director of Meago Asset Managers director Jay Padayachi said the worst performer was Accelerate Property Fund which saw returns decline of 1.4%, followed by Delta Property Fund (-1.2%) and Rebosis Property Fund (-1.2%).

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