Nesi joined RMB Asset Management's fledgling Investment Excellence training programme in 2002 after completing his Finance Honours degree. On joining RMB Asset Management, he was a member of the consumer industrial team, but assumed non-consumer research responsibilities as well. In January 2007 he was promoted to senior analyst for the life assurance sector in addition to current research and fund management responsibilities. He currently has research responsibilities for all the shares in the financial sector in addition to the managing of the RMB Financial Services Fund. At UND he was awarded the University Honours scholarship, Accenture class medal and was on the Dean's Merit List - 1999, 2000 and 2001.
Momentum Property comment - Jun 14
Global economic conditions appear to be on the mend, but risks to the outlook remain. In support of the pedestrian global recovery, key central banks have kept ultra-low monetary policy rates in place, which have, in turn, fuelled record stock market highs. Going forward, global equities are expected to be supported by accelerated earnings momentum, low inflation and fair to cheap valuations. Global fixed-income returns are conversely expected to face headwinds as the US Federal Reserve tapers and the market prices in the ultimate increase in interest rates (likely starting in 2015). South African (SA) equity valuations, which are not supported by underlying developed-market fundamentals, look expensive, which is likely to cause some underperformance.
While we expect more consistent growth in key developed regions, we see downside risks to the emerging market (EM) outlook given sluggish global trade activity and relatively weak domestic demand conditions. In the run-up to higher rates in the US, tighter financial conditions could further become a problem for countries, including SA, that remain highly dependent on foreign capital to fund their large external deficits.
Domestic labour unrest poses further risks to SA's economic outlook. Whereas significant growth downgrades are likely preventing a steeper interest rate profile at this stage, the need to anchor inflation expectations at a lower level and unusually-low real policy rates suggest further rate increases. We expect a 50-basis points hike in July, to be followed by a further 25 basis points in November and March, downwardly biased on growth concerns.
The listed property sector (SAPY) ended the second quarter of 2014 having achieved a total return of 4.4%, in the process beating both cash and nominal bonds, which delivered returns of 1.5% and 2.5% respectively. On the back of this performance, the sector's (SAPY) yield strengthened by 17 basis points to close at 6.33%, versus nominal bonds, which strengthened by 10 basis points over the period to end the quarter at 8.2%. The returns achieved by the sector during the quarter were marginally better than the 1.9% total returns achieved in the first quarter of the year. Over the quarter, the Momentum Property Fund performed in line with the sector, achieving a total return of 4.41%.
The property sector welcomed three small-cap property funds, which went public during the quarter. The first of these listings was Safari Properties, which listed on 7 April 2014 at a forward yield of 9.3%, followed by the Freedom Property Fund, which listed on 6 June. This was shortly followed by Equities Properties, an industrial sector-focused fund with assets in Cape Town. Equities listed on 18 June 2014 at an 8.8% forward yield. We elected not to participate in any of these listings through the fund and chose to rather wait for a more attractive entry point to take a stake in the businesses.
Sector consolidation continued well into the second quarter of the year, with Acucap and Sycom announcing their intention to merge. The proposed merger served as a catalyst for Growthpoint to show interest in both property funds. As a result, Growthpoint announced shortly afterwards that it had concluded agreements with various institutional investors to acquire a 34.9% and 31.5% interest in Acucap and Sycom respectively. We have exchanged our entire holdings in Acucap and Sycom for shares in Growthpoint in support of the transaction. Acucap and Sycom shares were up 14% and 16% respectively on the back of the anticipated corporate action.
The tripartite merger between Rebosis, Ascension and Delta Properties, which has been under negotiation since February, has been put on hold following a joint announcement by both Rebosis and Delta that the merger is not currently opportune. In line with the cooperation agreement concluded by the funds, Delta has sold its entire holding in Ascension to Rebosis. The Momentum Property Fund continues to have exposure to Rebosis and Delta, both of which are trading at attractive yields. .
We have been reducing the number of shares in the fund by selling out of illiquid counters. As a result, the fund does not have exposure to Tower Properties and the Synergy Property Fund and Hospitality Property Fund. The fund ended the quarter with a cash position of 3%, which will be used to take advantage of opportunities as they arise in the market.
We expect the volatile environment for fixed-income assets to continue as the global economy normalises. As a result, 2014 is likely to be a tough year for fixed-income assets, including listed property, with returns expected to remain modest in the course of this normalisation.
Despite these concerns, we remind investors that property is a long-term investment. Notwithstanding the headwinds impacting capital returns in the short term, property fundamentals are still supportive of real growth in distributions. On this basis, we are of the view that listed property will be a relatively stable performer over the long run, generating real returns above inflation for investors.
The Momentum Property Fund aims to maximise income yield and longterm capital growth through investments in listed property stocks, predominately listed on the FTSE/JSE.