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Listed property falters while bonds shine

The sector is likely to post single-digit total returns this year.

The stellar performance of listed property over the past three years appears to be moderating, with long-term SA government bonds starting to outshine most asset classes.

Latest figures from Cape-based Catalyst Fund Managers show that in the year to November 30, the FTSE/JSE SA Listed Property (Sapy) Index– which includes 20 of the biggest property companies – posted total returns of 5.72%.  This is well below the total returns delivered by government bonds of 13.67% during the same period.

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Source: Catalyst Fund Managers and RMB Credit Research

This doesn’t mean that listed property has lost its lustre as an attractive asset class, as it’s one of the sectors that still guarantees income-chasing investors dividend payouts from real estate investment trusts (Reits).

Most market watchers expect the sector to deliver single-digit total returns again in 2016. Listed property’s total returns for 2015 was 8%, much lower than the 26.6% posted in 2014.

Says Metope Investment Managers CEO Liliane Barnard: “the property sector as a whole has had a tough year in 2016, brought on by a slowdown in the local (and global) economy, rising administered costs to landlords and tenants alike, and decreasing business confidence impacting investment decisions.”  The volatile rand has also impacted the more than R350 billion listed property sector.

Barnard adds that the major swings in the Sapy Index since December 2015 have been brought on largely by political events and market sentiment rather than the underlying property fundamentals.

Recent financial results from Reits show that new shopping malls continue to take the shine from old and existing ones while retail sales continue to falter on the back of low consumer spending and confidence.

The industrial sector continues to be resilient with landlords achieving above-inflation rental growth and tenant retention on warehouse and logistics properties while the office sector is the laggard with rising vacancies on properties and the oversupply of rental space.

Barnard says despite these headwinds, most Reits have reported strong dividend growth, conservative debt profiles and strong asset management initiatives.

Finding gems in listed property

Given that there are 40-odd property counters listed on the JSE, finding value is increasingly becoming difficult.

However, the best-performing property stocks so far this year are SA-focused ones while offshore property stocks have been on a painful back foot given the recent rand strength. Of course, offshore property stocks are more sensitive to rand exchange movements given their hard-currency earnings.

In fact, the divergence between the total returns posted by SA-focused and offshore property stocks is more than 20%.

The best-performing stocks on a total return basis include Hospitality-A, which delivered total returns of 40.92%, Dipula Income Fund-A (33.05%), SA Corporate Real Estate (29.92%) and Equites Property Fund (23.69%).

The biggest losers are largely offshore counters, those that are focusing on the UK and greater Europe, among them Capital & Counties Properties (-51.79%), Redefine International (-42.37%), Schroder Real Estate (-39.63%), Capital & Regional (-37.12%) and Intu Properties (-33.34%).

These companies have been aggressively sold down since the Brexit vote in June, which has impacted the Sapy Index given their sizable weighting on the index.

Stanlib’s head of listed property funds Keillen Ndlovu says close to 40% of the index is exposed to offshore markets, largely in Central and Eastern Europe.  Ten years ago, the sector had no exposure to international markets.

Grindrod Asset Management chief investment officer Ian Anderson says the fact that bonds have outperformed listed property in SA this year is hardly surprising. In theory, listed property as an asset class and bond yields generally trend together over the long-term. However, this trend has become a thing of a past due to the increased offshore exposure in SA’s listed property sector, says Anderson. 

“Not only have SA businesses started allocating more capital offshore, offshore companies have listed their businesses in SA and inexplicably are eligible for inclusion in the Sapy index. This means that the SA listed property sector is now more closely correlated with global bond markets (which have done badly this year) and global listed property markets (which have done badly over the past 2 months),” he says. 

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I have made my views very clear on the REIT sector- DON’T BELIEVE THEM! there are numerous reasons – interest rates are on the increase, a lot of these funds are made for people along the way to have “their palms greased”, and finally buying property in eastern Europe!!!! finally the runs are on the board for the past year – down 50%!!!!

Disagree because:

– Interest rates are not on the increase
– REITs are have to pay out at least 75% of income to investors, so no palm greasing going on.
– Listed property has an outstanding track record, outperforming equities over the last 20 years.

I believe the saying goes “casting pearls before swine” – in other words probably wasting my time – BUT:
1)us int rates increased today – with more to come
2) they can pay our 100% but that is AFTER all the charges that have been paid along the way
3)REIT’s have a SHOCKING record – just look at capital and counties – down 50%!~!!!!

as a gesture of end-of-year goodwill – I post this comment about aussie REIT’s
“The winds of change are in the air however, and the tailwinds that previously made REITs so attractive could begin to blow in another direction, not to mention that investors must pay a large premium for most REITs. Here are some of the more popular REITs, and a few things to consider before buying”

full article here -http://www.fool.com.au/2016/12/13/an-investors-guide-to-buying-australian-reits-for-income/

Hi can anyone point me in the direction where I can buy government bonds – but not through some kind of an fund or scheme nonsense, as I’m trying to avoid costs.

I’ve been wanting to buy some for a while but keep ending up and spam websites while looking for information.

Get an account at Easy Equities (or another company) and buy Newfunds Govi ETF. Simples.

To the Navigator,

The whole reason I’m asking is to avoid pesky broker fees.

Thank you though, I should’ve been more specific.

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