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SA’s listed property stocks scale back

Analysts warn of high valuations.

Despite the strong rally in South Africa’s listed property sector over the past year, the prediction by industry players that the sector might be slowly running out of steam is starting to become evident.

The sector is starting to scale back from its highs and retreat further on a total returns basis.

The South African Listed Property Index (Sapy) – the measure of the performance of the listed property sector –delivered a growth of 0.04% in total returns (including dividends) for the month of April.

In the period under review, equities netted growth in returns of 4.7%, cash 0.51%, and bonds -0.49%. The property sector’s marginal growth follows the index recording 2.64% total returns in March.

The listed property sector’s performance for 2014 was ranked among the best performing JSE sector, with the Sapy index amassing total returns of 26.6% for 2014.

The sector has since ballooned, as the Sapy index delivered total returns of 44.3% (including dividends) for the 12 months to February 28.

This has been followed up by strong numbers in January and February, when the sector recorded total returns of 7.4% and 3.2% respectively.

The growth over the months has been supported by lower bond yields and strong earnings posted by JSE-listed companies. However, analysts are warning of high valuations of property stocks which might start to impact returns.

Sesfikile Capital in its sector report for the month of March says listed property prices “have run too hard and overshot the mark”.

This has been partly driven by a shortage of investable opportunities, which has forced investors to increase their appetite for the property sector.

“Not only have pension funds started realigning their property weightings to a more normalised level (towards 5%), but new entrants have also been active in the market,” it says.

Despite high valuations, the listed sector has been strong, but the best performing stocks for the 12 months to March have been retail sector-focused. Sesfikile Capital suggests that some of the best performing stocks on a total returns basis include Fortress B, Rockcastle, Resilient, New Europe Property Investments and Hyprop Investments.

These stocks recorded total returns in excess of 20%.

The short-term prospects look uncertain, as the price of property stocks has run “well-ahead of fundamentals”.

“However several management teams are making the most of the current environment by raising capital at ‘cheaper’ levels and acquiring long-term quality assets, as well as defensively positioning their balance sheets for those inevitable rainy days,” it says.

Since the start of 2015 local and offshore funds, or global real estate investment trusts (REITs) as they are commonly known, have embarked on capital raising sprees to fund growth ambitions. Read more here and here.

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