2013 listed property sector outlook

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20 Feb 2013

Prospects for the South African listed property sector look attractive to investors in 2013 with top manager revealing 5 listed property stocks to buy into for those wishing to cash in on returns.

Keillen Ndlovu, STANLIB head of listed property funds, notes that this increased role in property development will only come from a handful of the sectors’ over 30 companies, and not on a major scale.

Institutional investors are reportedly showing continued appetite for the sector, according to Norbert Sasse, chairman of the Property Loan Stock Association and chief executive officer of Growthpoint Properties Limited.

Developments and refurbishments

Sasse explains that listed property companies are also playing a larger role in new property development in South Africa.

“This development will favour mixed-use, retail and industrial development in the present market and the rush of retail developments in smaller towns in recent years will slow as retailers become more selective about new stores.”

Keillen Ndlovu, STANLIB head of listed property funds, notes that this increased role in property development will only come from a handful of the sectors’ over 30 companies, and not on a major scale.

“We’re likely to see more refurbishments and extensions, especially shopping centres which, in some cases, respond to imminent competition.”

He says there are several huge retail developments going up across the country, which means more competition thus forcing shopping centres to up their games.

However, says Ndlovu, large shopping centres are still experiencing good demand for space pointing out that Burger King has its sights set on opening stores in South Africa.

H&M is another possible entry into the South African retail market while Zara, Burberry, Cotton On and Top Shop recently opened stores and most international retailers want to expand their footprint across the country, he says.

Marc Wainer, chief executive officer of Redefine Properties, concurs with Sasse and Ndlovu that developments will be seen in retail and industrial properties and this will follow sector performance.

“The retail property sector should keep showing growth and industrial properties are on track for continued improvement, sadly, the office sector will underperform again,” says Wainer.

A move towards being energy efficient to reduce energy consumption is one way property owners are giving occupants added benefit, without charging more fees.

Dipula Income Fund chief executive officer Izak Petersen says we will see a fair deal of developments this year and some of these were announced in 2012 and are now being rolled out.

“We are unlikely to see many speculative developments, especially in the office and industrial sectors but there should be revamps in all three commercial sectors and the roll out of retail centres in both rural and urban areas,” says Petersen.

Acquisitions and finance

Sasse points out that while interest rates remain low, pricing yields on the listed property sector will continue to be low, which is good for capital raisings.

He foresees an improvement in funding from the banking sector driven by recent changes to some of the Basel 3 requirements.

“While the sector continues seek new ways of growing and new income streams, it is becoming increasingly focused on reducing the costs of occupancy for tenants.”

High operating costs increase tenants’ cost of doing business, putting pressure on their ability to pay rentals and this also means lower economic growth and lower demand for space, according to Sasse.

Wainer says gaining new assets won’t be easy as acquiring prime properties is increasingly difficult for listed property companies and this is set to continue in 2013.

To fund new assets, more listed property companies will venture away from traditional bank lending into the bond markets, says Ndlovu.

Sasse points out that while interest rates remain low, pricing yields on the listed property sector will continue to be low, which is good for capital raisings.

Furthermore, he says more companies will seek ratings from agencies to participate in the bond markets and secure debt which is a cheaper than traditional bank debt. 

“Banks are pricing their debt more competitively to keep some of their business with listed property companies.”

Green buildings

A move towards being energy efficient to reduce energy consumption is one way property owners are giving occupants added benefit, without charging more fees.

Companies are becoming smarter and more competitive with their tenant services and finding ways to differentiate their space besides building quality and location, according to Sasse.

Ndlovu points out that as investors become more socially responsible, the spotlight will be on green buildings.

“Most asset managers, like STANLIB, must now show that they look at the social responsibility of investments for impact on environment, society and governance.

“This also means the governance of sector companies is likely to receive more scrutiny,” he says.

Investing beyond South Africa’s borders

As with many businesses and sectors, the listed property sector will look for growth opportunities beyond South Africa’s borders, says Wainer.

He says offshore investments will continue to play a greater role for some of the larger players as there is still good value on offer and some listed companies will start to play an increasingly larger role in other African countries.

Sasse says this move into offshore investments is due to the fact that the local market is increasingly becoming competitive but points out that investment into developed markets will be tougher with the current Rand weakness.

Also, most of these property markets rerated substantially, driving yields significantly below those of South Africa.

He says investments in the US, UK and Europe are likely to be dilutive in most cases, but there are still some opportunities in Australia.

While local funds have ventured into markets such as Australia, UK, Germany and Romania, the focus is now shifting to the rest of the African continent, according to Ndlovu.

“Investment in property up Africa is gaining momentum with several SA property companies, listed and unlisted, targeting countries like Nigeria, Ghana, Kenya, Angola, Mozambique, Zambia and Mauritius.”

Most projects are at infancy stages and it will take the listed property sector two to three years to see the benefit of this, he says.

Meanwhile, Louise Lombard, FNB Commercial Property Finance (CPF) spokesperson, says with the high growth rate in Sub-Saharan Africa projected over the next 10 years, high yields can be obtained in these markets. 

For this reason, she says FNB is operating out of a number of African countries and FNB CPF has set up a property finance team to support existing and potential investors in Africa. – Denise Mhlanga

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