Real Estate Investor Magazine South Africa August 2013 | Page 48

LISTED

BY IAN ANDERSON

It’s Not Just Window Dressing

S

Listed investment takes home the prize

outh Africa’s listed property advanced
4.4% during June, despite investor fears
that global bond yields could rise further
as the US Federal Reserve ‘tapers’ its bond
purchases. The South African equity market
declined 5.7% in June and, as a result, listed
property is now the top performing major asset
class in South Africa in 2013, having risen 8.8%
since the beginning of the year.

Before investors get too excited about the
prospect of a rapid recovery in the listed property
sector, it should be noted that the prices of
Growthpoint Properties (+5.2%), Hyprop
Investments (+5.8%) and Redefine Properties
(+4.9%) were all pushed in the final hours of
trading in June, most probably as a last-ditch
effort by fund managers to ‘window-dress’ their
quarter-end performance.
Historically, the listed property sector has
bounced back quickly from rapid price pullbacks.
Since the start of the new millennium, South
Africa’s listed property sector has corrected on
three previous occasions, each in response to
unexpected increases in official interest rates, ie
increases in the repo and prime overdraft rates.
On each occasion, the listed property sector
has declined by approximately 20% over a three
month period, before recovering those losses in
the next three months.
The unexpected increases in official interest
rates that sparked the previous sell-offs were
always in response to an increase in consumer
inf lation above the South African Reserve
Bank ’s (SARB) targeted rate, or to cool a
rampant economy to prevent inf lation from
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August 2013 SA Real Estate Investor

moving above the SARB’s targeted rate.
Higher inflation and higher economic growth
are positive for the listed property sector as they
lead to higher rentals and distribution growth
over time.

This time around, the reasons for the increase
in bond yields are not linked to an increase in
inflation or growth expectations. Rather, bond
yields are rising to more normalised levels due to
the imminent withdrawal of monetary stimulus
by the US Federal Reserve, which has kept
global bond yields artificially low in an effort to
stimulate economic growth.
It therefore stands to reason that the recovery
in the listed property sector may take longer to
materialise, or may never materialise if bond
yields remain at these higher levels or continue
to move higher. Since the listed property sector
peaked on 17 May 2013, prices have on average
declined by 10.8%. However, on 24 June 2013,
they were down as much as 19.4% before being
pushed higher in the final week of June.
Most of the price volatility was experienced
in the larger, more liquid listed property
companies that have attracted a significant
foreign shareholding over the past f ive
years. From the peak in May, the price of
Growthpoint Properties fell as much as 22.9%,
Hyprop Investments declined 16.0%, Redefine
Properties declined 21.5% and Resilient
Property Income Fund dropped as much as
18.7%. All four stocks recovered strongly in
the final week of June. These companies remain
susceptible to further foreign selling on the
back of higher local and global bond yields and

investor nervousness about the prospects for
emerging markets.
The current forward yield on the listed property
sector is 6.8%, which is approximately 90 basis
points below the yield on a 10-year government
bond. Historically, the listed property sector
has traded on forward yields far closer to the
10-year government bond yield. Current pricing
therefore provides little downside protection
should local bond yields rise in response to
higher global bond yields or a further bout of
Rand weakness.
The average yield on the sector masks the
fact that there is still a number of smaller listed
property companies offering investors extremely
attractive initial income yields in excess of 8%, as
well as attractive distribution growth prospects
in excess of 9% per annum over the next three
years. A diversified portfolio of smaller listed
property stocks is likely to deliver returns of
between 15% and 20% per annum over the next
three to five years, despite the expected increase
in both bond and listed property yields.
Notwithstanding the short-term risks posed
by higher bond yields, listed property in South
Africa continues to offer investors an initial
income yield in excess of inf lation, as well as
inflation-beating growth in that income stream.
In the long term, inf lation-beating income
growth translates into inflation-beating capital
growth and long-term investors would be well
served by maintaining a healthy allocation (15%
to 25%) to listed property in their portfolios.

RESOURCES

Grindrod Assett Management
www.reimag.co.za