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Listed property: The dwindling expectation of greatness

As the property bull run cools down.

It’s no secret that the unprecedented run of property stocks over the past ten years has firmly placed listed property as a bellwether compared with other asset classes.

Investors who have backed SA’s listed property sector have been handsomely rewarded, more so than if they placed their bets on SA equities (the FTSE/JSE All-Share Index), ten-year government bonds or even cash.

Supporting this are figures from Grindrod Asset Management showing that South African Real Estate Investment Trusts (Reits) incorporated into the FTSE/JSE South African Property Index (Sapy), which excludes offshore property companies, delivered a 22.5% total return per annum between 1999 and May 2016.  

Over the same period SA equities and bonds notched up total returns of 15.4% and 10.5% respectively.  

Look at the comparison of asset classes in the graph below.  

 To use

 Source: I-Net Bridge & Grindrod Asset Management.

Even during the start of financial market strife in 2007, which was spurred by the global credit crisis, listed property held its own.

Speaking at the South African Property Owners Association’s 50th annual conference in Johannesburg on Wednesday, chief investment officer at Grindrod Asset Management Ian Anderson says listed property stocks were up about 20% at the height of market volatility in 2007 and 2008, while equity markets tanked during the period.  

This forced punters with a bias for equities to take note of the sector’s resilience. Also, a flurry of property listings, rousing deal-making, and capital raisings followed – amassing a lot of money for investors and property companies.

Although SA’s R630 billion-worth listed property sector has built an impressive track record over the years, fund managers still have a small allocation to the asset class. Quoting figures from the Association for Savings and Investment South Africa, Anderson says multi-asset funds as of March 2016 only have a 4.4% or R38.7 billion allocation into SA Reits. “It’s not uncommon in the US to find major pension players with upwards of 15% exposure to Reits. There is still scope for SA fund managers to continue to up-weight their listed property exposure,” he adds.

 Cracks emerge

It appears that the sector is starting to lose its lustre if the recent sizeable correction of the Sapy index is anything to go by. The index recorded its first negative total return this year of 3.47% for the month ended May 2016, figures from Cape-based Catalyst Fund Managers show. The decline was much bigger than other asset classes, with equities recording the highest total return of 1.84% compared with other asset classes in negative territory. However, from January to May, listed property still outperformed equities, bonds and cash. See table below.

Asset Class

Month-To-Date

Year-To-Date

12 Months

       

SA Listed Property

-3.47%

8.35%

9.36%

       

Bonds

-1.47%

6.93%

1.00%

       

Equities

1.84%

7.57%

6.25%

       

Cash

0.62%

2.88%

6.80%

 Source: Catalyst Fund Managers RMB Credit Research.

The month of May is widely considered by analysts to be turbulent in SA’s political and economic landscape. Rumours of the arrest of finance minister Pravin Gordhan and the possible downgrade to junk status by rating agency Standard & Poor’s in early June spooked bond and currency markets. Bond yields spiked from 7% to nearly 10%, exerting pressure on property prices, which generally trend together with bond yields over the long term.

So far this month the Sapy index seems to have recovered, as it had delivered a positive total return of 0.26% at the time of writing. Perhaps the recent results by property companies, which showed their resilience in posting inflation-beating dividend payouts to shareholders, is providing the growth vector to the index.  See a summary of company results below.

Company

Market Capitalisation – as at June 23, 2016

Dividend per share growth

Period

       

Redefine Properties

R55.3 billion

6.9%

Interim

       

Vukile Property Fund

R11.7 billion

7.0%

Full year

       

Investec Property Fund

R10.1 billion

4.6%

Full year

       

 Arrowhead Properties

R8.1 billion

9.5%

Interim

       

Sirius Real Estate

R6.8 billion

38.0%

Full year

       

Octodec Investments

R5.5 billion

1.7%

Interim

       

Pivotal Property Fund

R5.9 billion

n/a

Interim

       

Delta Property Fund

R4.7 billion

8.0%

Full year

       

Investec Australia Property Fund

R4.5 billion

12.1%

Full year

       

Equites Property Fund

R3.9 billion

18.3%

Full year

       

n/a – Not applicable.

     
       

Source: Catalyst Fund Managers and Moneyweb. 

The consensus is that it will be difficult for property companies to consistently post inflation-beating dividend payouts to income-chasing investors given a domestic economy that is besieged with glacial growth, high-interest rates and increased political uncertainty.

This cocktail of challenges is expected to see more property companies downgrade their dividend payout forecasts.

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