Investors who have enjoyed attractive returns from property stocks may have been disappointed with the lackluster performance of the sector, thanks to the volatile rand and bond market.
The SA listed property index (Sapy), which makes up the JSE’s 20 largest real estate stocks, has been on the back foot since February. The index has shed 1% in total returns delivered in the year to April 7, emerging as the worst performing asset class compared with equities, cash and ten-year government bonds.
Latest figures from Stanlib show that equities delivered total returns of 5.5% and 2% for both cash and bonds.
Stanlib’s head of listed property funds Keillen Ndlovu said at some point this year, the sector was up almost 6% but all gains were eroded by higher bond yields. The property sector generally has a relationship with bond yields – when bond yields fall property prices rise and vice-versa.
Bond yields have risen on the back of a weak rand, which has been negatively affected in recent weeks by political uncertainty and last week’s double ratings downgrade to junk status by S&P Global Ratings and Fitch.
The rand has weakened by 3% and bond yields have risen as high as 8.9% since president Jacob Zuma’s politically-charged cabinet reshuffle.
Nesi Chetty, head of property at MMI Investments & Savings, said despite the big swings in the Sapy index, property stocks are trading at an attractive forward yield of 7% to 9%. Heightening the attractiveness of valuations in the sector is that SA-focused JSE-listed property companies are still posting inflation-beating dividend growth of 8%.
Stock selection in SA’s listed property sector is increasingly important but also difficult given the sustained volatility in share prices. “You want to be invested in companies with high dividend growth and don’t have to do a lot to get growth over the next 24 months,” said Chetty.
A look at the performance of individual property stocks shows a wide divergence between the winners and losers in the first three months of 2017 (see below).
|Best performing property stocks in the year to March 31|
|Company||Total returns||Share price movement|
|Ingenuity Property Investments||17.78%||17.78%|
|Dipula Property Fund-B||16.67%||30%|
|Ascension Properties- A||14.56%||5.49%|
|Texton Property Fund Limited||14.18%||3.54%|
|Worst performing stocks|
|New Europe Property Investments||(12.45%)||(8.32%)|
Source: Catalyst Fund Managers, Moneyweb.
SA-focused property companies have emerged as the best-performing stocks and the biggest losers are offshore property stocks, which are still recovering from the recent rand strength.
Even the share prices of liquid sector heavyweights including Growthpoint Properties, Redefine Properties and Hyprop Investments have been volatile in recent weeks as they have a large number of foreign shareholders, who have sold down their stock as political uncertainty heightened.
Ndlovu said Stanlib has been selectively increasing its offshore exposure, taking advantage of discounted prices. It has recently increased its allocations to Romania-focused New Europe Property Investments (Nepi) and Europe-focused MAS Real Estate. Both companies raised new capital (R1 billion each) in March.
“The call to gradually increase offshore exposure (like Nepi and MAS) is based on fundamentals and valuations and not on currency speculation or movements,” he said.
MMI Investments & Savings also currently finds value in MAS and Poland-focused Echo Polska Properties (EPP), whose share price has been sold down by 2% in the past three months. MMI’s property analyst Pelo Manyeneng said given the sell-off in EPP’s share price, a strong recovery is expected as the company’s pending acquisitions “have significant yield enhancing asset management opportunities”.
Cape-based Catalyst Fund Managers believes that property fundamentals of companies will drive long-term property returns. “But in the short-term foreign exchange volatility is a feature we need to contend with in the SA’s listed property sector,” the company said in a note.