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SA’s listed property sector cools down

After a nearly year-long bull run.
Sapy index has lost 9.5% of its valuation.

It seems like the unprecedented run of South Africa’s listed property sector which has firmly entrenched the sector as an attractive asset class is starting to show indications of cooling down.

While many industry players viewed the sector as reaching the top of the cycle, given that property share prices hit an upward curve over many months, the sector has recently seen a correction.

The FTSE/JSE South African listed property index (Sapy), a measure of the sector’s performance, has lost 9.5% of its valuation (as of Monday), since its peak of 9% in April.

The losing streak of the sector started in May as the Sapy index delivered its first negative return since May last year, losing 5.9%, according to latest figures from Sesfikile Capital.

During the month, listed property has been the worst performer compared with other asset classes; as equities pulled back by 4% and bonds contracted by 0.7%.

“This correction was not unexpected and the recent exuberance had been cautioned… This is not to say a further correction is not possible, in fact, we believe that the market can credibly pull back another 5% to 10%,” Sesfikile Capital wrote in a research note.

Despite the sector’s pullback, the asset class in the first five months of the year delivered a total return (including dividends) to investors of more than 7%. 

The decline seen in the sector is a result of bond yields weakening, as 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. “The SA ten-year bond yield increased over 50 basis points over this period,” he said.

The movement in the bond yield was due to global interest rate pressures, he added, as the US Federal Reserve (Fed) is expected to raise interest rates in the second half of the year. This has created jitters in the market, as it will be the first interest rate increase in nearly ten years.

“This movement [decline of the Sapy index] should not be a surprise, listed property prices can be volatile and the sector had gone up considerably,” Robins said.

The listed property sector has been resilient despite difficult macroeconomic factors, said a Johannesburg-based analyst. He said that South Africa’s macroeconomic outlook is worsening; given the tepid economic growth which is expected to reach less than 2% in 2015 and the prospects of interest rates rising “by 25 basis points” in the second-half of  the year.

Just in 2014, the Sapy index delivered a 26.6% total return (including dividends), surpassing the All Share Index, which only returned 10.9%. The rally in the index has been aided by strong bond yield performance, growth in earnings and deal making in the form of mergers and acquisitions.

Retail centre-focused Fortress Income Fund’s B unit was the top performer, returning 100%. Rand hedge stocks Rockcastle Global Real Estate and Romania-focused New Europe Property Investments returned 82% and 47% respectively. Resilient Property Income Fund amassed a 61% return for investors.

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%.

“The recent spate of reporting [by property companies] still managed to impress with inflation-beating distribution growth across the board. But the momentum has started to wane and management are all highlighting the tougher operating environment ahead,” Sesfikile Capital said. It expects distribution growth over the next 12 months to remain ahead of inflation (4.6% – for May).

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