SA listed property returns: time to moderate expectations

Unprecedented run in investor returns to cool down.
Listed property total returns are expected to slow.

Income-chasing investors expecting listed property’s attractive returns to continue, are likely in for a rude awakening.

Although the listed property sector did not [initially] pique the interest of many investors, who often had a bias toward equities, the sector grew a reputation fast after 2002.

As Sesfikile Capital director Kundayi Munzara puts it: “We call it the genesis of the listed property sector [after the 2002 period]. This is when the sector came to its own after not getting a lot of attention.”

Since then, investors in the sector have been coining it. Over the past ten years, listed property has firmly outperformed equities, cash and bonds.

Investors who placed their bets on the sector by investing R100 at the end of August in 2005 would have amassed a cool R603, compared with R431 delivered by equities, and R203 and R221 by cash and bonds respectively.

Figures from Sesfikile Capital show that in the 12 months to August this year, the sector clocked up total returns of 28%, compared with 20% in the same period in 2014. And the year prior, the sector delivered total returns of 38%.

You don’t have to look far for reasons behind the sector’s performance over the years: strong distribution growth (an earnings measure by which investors typically rate property companies), a low interest rate environment and decent economic growth. This prompted several market watchers to rate listed property as looking toppish.

End of the run?

But questions are surfacing about the sustainability of the sector’s unprecedented run. It seems like signs of the sector cooling down are becoming evident, as in May it delivered its first negative total return in over a year, losing 5.9%. The sector was the worst performer, as equities pulled back by 4% and bonds contracted by 0.7%.

Speaking at the South African Council of Shopping Centres Congress last week, Munzara said the weak domestic economic growth rate (expected to be less than 2% for 2015) and prospects that the US Federal Reserve would raise interest rates for the first time in nearly ten years, might weigh on listed property.

The Fed’s decision might spill over to bond markets and subsequently impact the sector, as listed property and bond yields generally trend together over the long term. 

Said Munzara: “On the short term the biggest risk is what happens on the bond market. Interest rates will likely rise in the US and SA and that will have a detrimental impact on the returns one should expect over the next few years.” On a three- to ten-year horizon, he expects total returns to moderate in the region of 10% to 14%.

Another pressure point for the sector is that investors are getting a lower yield in listed property than in bonds. Listed property is trading at a forward yield of 7% compared with bond yields of 8% – this is indicative that the sector is expensive, says head of listed property funds at Stanlib, Keillen Ndlovu.

“At these levels listed property does not look cheap and we advise investors to moderate their expectations going forward,” Ndlovu says.   

Global property is trading at a yield of 4%, whereas bonds are trading at 2%. “In a global context SA is not looking attractive at this point,” says Munzara.

Property counters on the JSE’s more than R500 billion real estate sector are feeling the pressure, as some are already warning about the difficulties in delivering above-inflation distribution growth. Recently, sector heavyweight Growthpoint Properties announced that it expects distribution growth to slow between 5% and 6% next year, below market expectations of 7.5%, citing macroeconomic headwinds.

However, an actively managed listed property company is still capable of producing income growth well in excess of consumer inflation, says Grindrod Asset Management chief investment officer Ian Anderson. “This is a highly prized attribute in a world where earnings growth is becoming increasingly scarce and where earnings downgrades and negative surprises are becoming more commonplace,” Anderson adds.

*The writer was a guest of the South African Council of Shopping Centres at its congress in Durban last week.



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