Real Estate Investor Magazine South Africa April 2014 | Page 51

COMMERCIAL
and interest rates are low. Shopping malls, off ice
parks or industrial developments, typically owned
by listed property companies, should do well under
similar economic conditions. However, from a
return perspective, the experience of a house owner
compared to an investor in listed property shares is
very different.
As JSE-listed securities, the prices of these property
companies are determined daily by the market.
Investors take views on rental growth, vacancies,
funding cost and the value of each propert y to
determine what shares are worth. Future acquisitions
or developments and concepts like ‘balance sheet
gearing’ also drive prices. Importantly, however,
investors look at other asset classes like cash, bonds or
shares to determine where they will achieve the best
future returns.

Property returns driven by falling interest rates
Listed property is predominantly bought for the
income distributions (dividends) paid by these
companies, and the dividend yield relative to bond
yields is an important valuation measure. The fall in
interest rates over the last ten years saw property yields
declining from above 11% to around 6%.

This reduction in yield had a massive positive impact
on prices; in fact, this was the largest driver of returns.
An important point, which we will get back to, is the
question of what lies ahead for bond yields.

Positive impact
The reduction in property yields is partly due to a
large contraction in the property spread, that is,
the difference between the property yield and the
government bond yield. As investor sentiment
towards listed property improved during the past
decade, property yields went from higher than bond
yields to lower than bond yields; in other words, the
spread became negative.

“The single best aspect of listed
property is that over time,
dividend distributions grow
roughly in line with inflation.”

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