20 Mar 2013
With distribution growth expected to accelerate towards 8 percent in 2013 and 2014, South Africa’s listed property sector looks poised for another year of inflation-beating returns, although not the 36 percent plus return investors enjoyed last year, explains Ian Anderson, chief investment officer at Grindrod Asset Management.
Anderson says the introduction of REIT legislation in April will lead to increased interest from foreign investors, while the Reserve Bank is likely to keep official interest rates at historically low levels while economic growth is sluggish.
“This should lend support to current valuations, and the combination of a 6.5 percent initial yield and 8 percent distribution growth should translate into total returns in excess of 10 percent this year,” he says.
Anderson points out that listed property’s high initial yield and inflation-beating income growth prospects make it an ideal long-term investment.
In 2013 listed property sector outlook, property owners and managers note that the sector continues to attract investors thanks to income and distribution growth yields.
“Based on the current yield and our current long-term inflation assumptions, listed property is capable of producing returns of around 15 percent per annum in the long term.
“In the short term, there may be periods when investors experience capital volatility, but the longer-term outlook remains extremely favourable,” says Anderson.
3 stocks to buy into
Asked on three stocks to buy into and why, he says a number of companies in the sector continue to offer initial yields in excess of 8 percent, despite the fact they are expected to produce medium-term income growth in excess of the sector average.
This fund currently offers investors an initial yield in excess of 9 percent and medium-term distribution growth of around 8 to 10 percent per annum.
That should translate into total returns of approximately 20 percent per annum over the next three to five years.
The company has recently announced the acquisition of a substantial portfolio of properties, which should help build critical mass, says Anderson.
In 5 listed property stocks to buy into, Keillen Ndlovu, STANLIB head of listed property funds picked this fund, an indication that investors are surely racking in some good returns on this one.
Despite its recent sharp price increase, New Europe Property Investments (NEPI) continues to offer investors an attractive income yield and above-average income growth prospects in Euros, according to Anderson.
“The company continues to benefit from a low cost of capital and exceptional growth opportunities in the Romanian property market.”
This stock offers investors an initial income yield in excess of 8 percent and distribution growth of approximately 10 percent per annum over the next three years, says Anderson.
It is black-owned and black-managed and is able to sign long-term leases with government as a tenant, he says.
Asked about equities and bonds and whether these are a good buy or not, he says yields on bonds, without the prospect for income and capital growth, are not attractive relative to their long-term inflation outlook.
In Listed property outperforms bonds, Anderson notes that since the start of the year, both the listed property sector and the FTSE/JSE All Share Index have returned 3.7 percent, while the bond market has returned just 0.6 percent
Equities, on the other hand, are likely to produce strong income and capital growth in the years ahead, particularly if the global economy, supported by massive stimulus, continues to recover throughout 2013 and 2014, he points out.
“The current dividend yield on South African equities is not far off the long-term average, thus medium-term returns should be between 15 and 20 percent per annum,” he says.
Meanwhile, according to the Catalyst Fund Managers, the South African Listed Property Index recorded a total return of 4.64 percent in February 2013 while the Property Loan Stock Index and Property Unit Trust Index recorded returns of 4.18 and 4.58 percent respectively.
As of 28 February 2013 the historic rolled income yield of SA listed property was 6.36 percent.
They say the outlook for distribution growth in 2013 remains reasonable and the sector is likely to deliver better than inflationary type growth in income distributions.
The yield to maturity on the Long Term Government Bond Index ended the month at 6.81 percent (6.87 percent in January) and the historic yield of the sector ended the month at 6.36 percent (6.60 percent in January).
According to the managers, SA Listed Property recorded the highest total return (+ 4.58 percent) of the four traditional asset classes for February with SA equities recording + 1.70 percent) and SA Cash (+ 0.44 percent) making them the next best performing asset classes for the month.
The best performer in terms of ‘like for like’ comparable distribution growth was Fortress B (44.6 percent interim distribution growth), followed by Hospitality B (16.2 percent interim distribution growth).
Catalyst managers say the worst performer in terms of distribution growth was Emira (3.5 percent interim distribution growth).
The market capitalisation weighted average distribution growth (excluding NEPI and those companies without a comparable period) of these reporting companies was approximately 7.7 percent, according to the managers.- Denise Mhlanga
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