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SA’s residential sector outperforms ‘All Property Index’ in total returns

28 May 2019

Results of the latest Absa-MSCI Residential Index have revealed that the South African residential sector outperformed the 'All Property Index' by 1.2% in terms of total returns, registering a total return of 11.2% during 2018. This performance was second only to the Industrial sector which achieved 11.7%.

Despite the general weak economy, a total return of 10% for the All Property Index and 11.2% for Residential Property represents a moderate performance given the challenging economic backdrop, says Dieperink.

Amelia Dieperink, Absa Head of Affordable Housing - Commercial Property Finance, says the results indicate the residential sector can hold its own and compete for capital with the more established property sectors such as office, retail and industrial.

Out of the 20 markets producing residential results, as measured by MSCI, South Africa was third behind the Netherlands and Canada. This compared with 17.8% for the Netherlands and 11.5% for Canada. However, South Africa was ahead of Germany, which achieved a total return of 10.8%. Of all the countries assessed thus far, Italy had the lowest total return, at 2.8%.

The Absa-MSCI Residential Results are sponsored by Absa Commercial Property Finance and produced by MSCI, a leading global provider of real estate investment tools. The results are based on actual records of revenues, operating costs and annual valuations for individual properties that form part of the sample portfolio.

The All Property Index in South Africa achieved a total return of 10% in 2018, well below the long-term average total return of approximately 15%. “This demonstrates that property returns are taking strain from the weak economy over the past few years. Nonetheless, we believe that despite the general weak economy, a total return of 10% for the All Property Index and 11.2% for Residential Property represents a moderate performance given the challenging economic backdrop,” she says.

Dieperink says the portfolio of properties that were assessed to produce the latest results had a higher weighting towards affordable housing, whose income returns “were a lot more robust, reflecting a return of 8.9%, relative to only 6.5% achieved in the balance of the residential universe – the former makes up at least 84% of the portfolio.”

Another interesting development was that Cape Town and Johannesburg featured in the top 10 cities that achieved the highest total returns from all the cities within the 20 markets that produce residential results globally.

“The major metropolitan areas in South Africa are clearly more attractive, with Cape Town achieving a total return of 20.3%, whilst Johannesburg achieved 13.7%,” says Dieperink.

Other highlights of the results include:

  • Globally, income returns are at the lower end of the range achieved for the period between 2001 and 2018. This trend is replicated in South Africa, showing residential properties tracked by MSCI exhibiting relatively high property values at this stage.
  • Residential property’s capital growth of 2% was above that of the All Property Index, which was 1.8%. When the components explaining capital growth are unpacked, the data shows that base rental growth contributes positively, whereas residential yields diminish the extent of capital growth.
  • It was also noted that the South African economy has experienced weak growth over the past few years. In particular, there has been slowing growth in nominal wages, while the credit health of consumers is deteriorating. As a result, consumer confidence has also come down from the temporary high achieved early in 2018.

Dieperink says Absa Commercial Property Finance is encouraged by the level of interest demonstrated by property owners who contribute data for the residential results. The Bank looks forward to these results being incorporated as part of the suite of MSCI indices in future.

“These returns clearly demonstrate that the South African Residential sector deserves its place alongside the Retail, Industrial and Office sectors. Subject to different demand and supply drivers, it will be interesting to compare the return profile over time and its ability to diversify risk return for the sector,” she says.

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