13 Feb 2013
In 2012, listed property outperformed cash, bonds and equities with total returns of 36 percent to become South Africa’s best performing asset class for the fourth consecutive year, according to the Property Loan Stock Association (PLSA).
PLSA expects 2013 to be another good year that can uniquely predict its short-term performance with good levels of accuracy, as its performance is underpinned with rental income from contractual agreements.
“Listed property income should grow by over 6 percent in 2013 and improve to 7 percent in 2014,” says Keillen Ndlovu, STANLIB head of listed property funds.
“Our base case for listed property total returns in 2013 is 9 percent and our bull case forecasts 16 percent total returns and our bear case only forecasts 2.2 percent – the biggest driver of changes in total returns is movement in bond yields.”
Asked if this is a good time to buy listed property and why, Ndlovu explains that listed property is a great diversifier.
“It produces a regular source of growing income and capital growth over time and has a low correlation to equities.”
For example, he says in 2012 the correlation was only 18 percent and the correlation with bonds is higher because of the listed property sector’s ability to generate income.
The correlation to bonds was 68 percent in 2012.
Ndlovu points out that listed property has helped to boost returns in balanced portfolios and has also helped to reduce risk thus helping balanced funds to deliver better risk-adjusted returns.
“It is a long-term story – the investment horizon should be three to five years and investors should ride out short-term volatility,” he says.
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Ndlovu says they like its strong management and its industrial focus.
The fund has a good development pipeline which is yield enhancing and the industrial sector has the lowest vacancies of all three major sectors (office, retail and industrial).
“Its valuation is attractive at 7.3 percent yield (market average of 6.9 percent) and this fund should trade at a lower yield than the market (i.e. the price has to go up).”
Given the quality of its portfolio, it is cheap relative to the market.
The portfolio is focused on the retail and office sectors and we like the defensive nature of its properties, says Ndlovu.
The offices are government tenanted (mainly national government) on long leases whereas the retail consists of dominant regional shopping centres and some lower income centres (this is where the population is and this is where the growth is).
Delta is focused mainly on offices tenanted by government and SARS on long leases and trading at a forward yield of 9.6 percent compared to the market average of 6.9 percent.
It is a recently listed fund and the price should rerate after the pending acquisition of R1.7 billion worth of properties is complete.
This fund offers high yield income and management is very selective with the properties they acquire – this fund does not chase size for the sake of size, notes Ndlovu.
It has a small and manageable portfolio and is trading at a forward yield of 9.7 percent compared to the market average of 6.9 percent.
Hyprop dominates retail in metropolitan areas and the flagship shopping centre is Canal Walk in Century City, Cape Town which is dominant in the area and is seeing lots of demand for space.
He says its forward yield of 6.2 percent reflects the quality and defensive nature of its portfolio and good management as well.
Listed property prospects
According to Norbert Sasse, chairman of the PLSA and chief executive officer of Growthpoint Properties Limited, investors can expect distribution growth from the sector to average between 5 and 8 percent in 2013.
He anticipates listed property total returns between 10 and 16 percent and says while still positive - this is well below the total returns of 2012.
“With tougher market conditions overall, companies that can manage vacancies and costs are better positioned to deliver performance for investors.”
He says sectoral portfolio composition will also influence performance and weak demand will continue in the office sector.
However, retail and industrial property will perform well off a base of low vacancies that should remain stable, he says.
Corporate activity will be seen in the market especially smaller funds merging to gain critical mass and taking a defensive position in a market where larger funds are pursing aggressive acquisition strategies, says Sasse.
“Property acquisitions will remain robust given low interest rates, the forward yield of listed property sector, and the availability and affordability of funding.
“Newer funds and funds with ambitions to list will be keen to snatch up assets from the sector’s larger players,” says Sasse
According to Ndlovu, newly listed property companies will continue their growth strategies and with limited physical property stock available, listed property companies will start eyeing each other.
This could lead to mergers and takeovers, he says.
Over the past 24 months, the sector saw a spate of new listings. While more companies are expected to join the sector, the number is likely decrease in 2013.
Ndlovu says South Africa’s first residential listed property fund could debut this year.
Equity raisings will remain prominent in the sector, but not to the same extent as in recent years.
About R11 billion of equity came into the listed property space in 2012, (R16 billion in 2011).
In April 2013 REIT (Real Estate Investment Trust) legislation will be introduced in South Africa.
Spearheaded by the PLSA for its positive impacts on the sector, this legislation will provide tax certainty and align South Africa with global investment structures and established REIT markets like the US, Australia, Hong Kong, Singapore and the UK.
Marc Wainer, chief executive officer of Redefine Properties, says the introduction of REIT will be a positive catalyst for the sector in the coming year.
“Apart from the many benefits of the new REIT legislation, including tax certainty, it should result in more international investors in our sector.
“Interest from international investors remains high and this is where growth will come from,” he says.
Wainer expects total returns of between 14 and 18 percent from the sector.
He points to difficulties in acquiring prime properties and this will persist in 2013, however, smaller funds should enjoy high levels of acquisitions.
Dipula Income Fund expects returns of between 10 and 15 percent this year, says chief executive officer, Izak Petersen.
“Property companies in the listed property sector will continue to be well capitalised and take advantage of expansion opportunities.”
Growing the sector’s asset base, Petersen believes funds will continue taking advantage of well-priced capital and the market is likely to see a noteworthy number of acquisitions announced in 2013.
Since listing on the Johannesburg Stock Exchange in August 2011, Dipula has announced five major acquisition transactions worth approximately R1.4 billion.
In 2012, Ndlovu picked Dipula as top prospect fund to buy into thanks to its secure and predictable income streams.
Read the article here.
Dipula owns properties valued at approximately R3 billion following the successful transfer into its name of properties worth approximately R600 million in December 2012.
With slow economic growth expected in 2013, a further downgrade of South Africa by rating agencies is a threat to listed property’s performance, according to Sasse and Wainer.
Sasse says this would weaken the Rand with knock-on effects for the domestic banking and bond markets and the resultant spike in inflation and interest rates would lower listed property prices.
“This would result in a sell-off of South African bonds and depress the price of listed property securities,” says Wainer.
Petersen says this year will see continued pressure on commercial property owners and occupants from administered prices and municipal charges.
“Slow economic growth will continue and, as a result, rental growth will be modest, but, the listed sector should still hold its own performance, in relative terms.
“Most funds should report positive income growth,” he adds. – Denise Mhlanga
Denise MhlangaProperty journalist at property24.com
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