South Africa vs global listed property

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31 May 2013

Listed property markets have benefited from declining interest rates and bond yields, producing stellar returns for investors, notes Ian Anderson, chief investment officer at Grindrod Asset Management.

Investors have been attracted to listed property because of the relatively high income yields on offer, as well as the transparency and ease of forecasting earnings from listed property companies.

He says in South Africa, investors have enjoyed returns in excess of 40 percent over the past year, while investors in offshore property markets have enjoyed returns of close to 25 percent in US dollars over the same time period.

“Investors have been attracted to listed property because of the relatively high income yields on offer, as well as the transparency and ease of forecasting earnings from listed property companies,” says Anderson.

He says despite the significant price increases and resultant drop in yields, listed property continues to look attractive relative to the bond market, both locally and offshore.

Marriott Asset Management says with global bond yields being at historically low levels it is unsurprising that both local and offshore property has performed well.

Over the last three years, local property in Rand terms have recorded annualised returns of 26 percent per annum while global property in Dollar terms recorded 17 percent per annum.

“Despite significant price appreciation we still feel global property offers investors relative value especially when one considers the yield of this asset class is twice that of the yield offered by government bonds,” say the managers.

In contrast to offshore property, local property yields have followed long bond yield to historical low levels. Consequently the outlook for this asset class is not as favourable, according to Marriott.          

Marriott says despite significant price appreciation, they still feel global property offers investors relative value especially when one considers the yield of this asset class is twice that of the yield offered by government bonds as indicated by the graph.

Anderson says the current forward yield on listed property in South Africa is around 6 percent, while offshore is approximately 3.5 percent.

He points out that distribution growth in South Africa's listed property sector is expected to accelerate towards 8 percent, while globally, growth will be more muted at between 3 and 5 percent per annum over the next 3 years.

“Investors going offshore are therefore giving up approximately 1.5 percent in initial income yield, but more importantly, giving up between 3 and 5 percent per annum income growth,” says Anderson.

Should you invest locally or globally?

Asked where investors in listed property should be putting their money and why, Marriott managers say a relatively high and reliable income stream that grows over time has always been the biggest attraction for an investment in listed property.

“However, we would not invest in local listed property today as the price you will be paying for the income stream is excessive and we believe investors will be able to enter local property at a better time in the future.”

For investors who are living off the income stream from their property investment we would urge them to restrict their drawings to only what is being produced as this will ensure their capital will last, says the managers.

Furthermore, Marriott says they are concerned for local investors especially if bond yields moved higher as this could result in significant capital loss.

Meanwhile, Anderson says in the long term, capital growth is a function of income growth, so investors going offshore are also giving up between 3 and 5 percent  per annum capital growth.

“In order for those investors to enjoy South African-like returns from their property investments, the Rand would need to depreciate by between 4.5 and 6.5 percent per annum, which is certainly possible but not a certainty,” he says.

In contrast to offshore property, local property yields have followed long bond yield to historical low levels and consequently the outlook for this asset class is not as favourable.

Read more about the Rand depreciation here.

The PlexCrown Fund Ratings report reveals that Global Equity General with a return of 16.43 percent was rated the best-performing unit trust subcategory for the quarter to 31 March 2013, while Global Real Estate was the best subcategory overall for the year with a return of 39.11 percent.

According to the report, South African real estate ranks as the best-performing South African subcategory in latest quarterly PlexCrown Survey for the March quarter with 8.04 percent (dividends and interest reinvested), followed by South African Equity Industrial and South African Equity mid and small cap with 6.73 and 6.19 percent respectively.

The subcategory was also the third-best overall over one and five years and second-best over three years.

Old Mutual Global Equity Fund and Allan Gray-Orbis Global Equity Feeder Fund were the best performing funds over the quarter with total returns of 22.94 and 22.79 percent respectively.

Prescient Africa Equity Fund and Momentum Africa Fund were the best performing funds over the last year to 31 March with 53.82 and 53.66 percent respectively, while Satrix INDI and Coronation Industrial topped the charts over three and five years respectively, according to the report.

According to the report, the global equity market rally continued unabated in the first quarter despite stretched valuation levels and concerns regarding the earnings growth outlook in developed economies in the light of the impact of austerity measures.

The swing of investor sentiment away from emerging markets to mature-market equities was evident, with the MSCI World Index returning 7.9 percent in US dollars over the quarter while the MSCI Emerging Market Index contracted by 1.6 percent in US dollars.

The FTSE/JSE All Share index (Alsi) fared even worse and ended the quarter 7.6 percent down in US dollars as the perfect storm hit the South African economy with the downgrading of the country’s credit rating, inflation pressures, infrastructure shortfalls and increased socio-economic stresses.

This saw the Rand falling by 9.0 percent against the US dollar and 6.4 percent against the Euro over the quarter.

In Rands, the JSE as measured by the Alsi returned 2.48 percent with dividends reinvested, because the weaker rand supported dual-listed foreign equity prices.

The 17.0 percent fall of the Rand against the US dollar over the past 12 months cushioned the Alsi, resulting in a total return of 22.5 percent for the past 12 months with dividends reinvested.

The FTSE/JSE Industrial Index and the FTSE/JSE Listed Property Index returned 10.57 percent and 9.14 percent respectively with interest and dividends reinvested, while the FTSE/JSE Financial Index returned 6.31 percent.

South Africa’s listed property sector has a market capitalisation of some R250 billion. In 2014 it is likely to become the eighth largest REIT market globally with around 26 REIT entities and potentially more to come.

According to the report, the FTSE/JSE Listed Property Index also led over 12 months with a return of 37.28 percent (interest and dividends reinvested), followed by the FTSE/JSE Financial Index and FTSE/JSE Industrial Index with 29.67 percent and 35.43 percent respectively.

SA REITS structure

In South Africa, listed property investors will be happy to know that the REIT (Real Estate Investment Trust) structure has put the listed property sector more firmly on the radar of international investors and provides a simple, clear tax structure and is an internationally recognisable tax dispensation for investment property.

More than 25 countries in the world use a similar REIT model like the US, Australia, France, Hong Kong, Japan, Singapore and the UK.

Officially launched this month, the SA REIT Association’s goal is to advance and protect the interests of the listed sector, comprising both Company REITs (formerly property loans stocks) and Trust REITs (formerly property unit trusts).

South Africa’s listed property sector has a market capitalisation of some R250 billion.

In 2014 it is likely to become the eighth largest REIT market globally with around 26 REIT entities and potentially more to come.

Over the past 10 years it has outperformed local equities, bonds and cash and has also outperformed REITs in the developed world, according to the association.

Managers’ top stocks to buy into

When asked about top local and global listed stocks to invest into, Marriott managers say the key considerations for the stocks they have chosen below are consistent distributions track records, quality property portfolios and liquidity.

Local – relatively expensive

1. Growthpoint Properties Limited

Growthpoint is the largest listed property company in South Africa with a quality diversified portfolio in retail, office and industrial space.

One of the properties they own – the V&A Waterfront in Cape Town is considered to be the crown jewel of South African retail property and is illustrative of the high quality nature of their properties.

“We also believe that Growthpoint has the best property management team in the country.”

2. Hyprop Investments Limited

The company specialises in shopping centres and owns some of the premier retail malls across South Africa including Canal Walk, Hyde Park Corner, Rosebank Mall, Clearwater Mall and The Glen to name a few.

With an expectation of growth in income of 3 percent per annum over the next three years and a yield of approximately 4 percent, British Land offers investors value, according to Marriott Asset managers.

Marriott says the blue chip nature of their tenant base will ensure consistent distributions in the years ahead.

3. Capital Property Fund

It specialises in industrial property with their portfolio split being approximately 74 percent industrial, 9 percent retail, and 16 percent office space.

A shortage in industrial space should ensure lower vacancies in the current tough economic environment.

Offshore - better value

1. Land Securities

Is the largest commercial property portfolio in the UK and has current yield of approximately 3 percent with an expectation of 5 percent per annum growth in income over the next 3 years is attractive.

2. SEGRO

This is one of Europe’s leading industrial focused REITS and is currently yielding approximately 5.4 percent.

3. British Land

Is predominantly a retail focused property portfolio with the majority of their portfolio spread across Europe.

With an expectation of growth in income of 3 percent per annum over the next three years and a yield of approximately 4 percent, British Land offers investors value, add the managers. – Denise Mhlanga

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