Real Estate Investor Magazine South Africa July 2013 | Page 40

LISTED BY IAN ANDERSON Brace Yourself... The ride might get a little bumpy S outh Africa’s listed property sector has succumbed to a weaker Rand and higher bond yields. During May 2013, the sector declined by 11.1%, led by substantial declines in many of the larger, more liquid companies that are widely held by institutional and foreign investors. Over the past two years, South Africa’s listed property sector has benefited from declining bond yields and a reduction in official interest rates. However, during May, bond yields in South Africa rose due to higher yields in the US and country specific issues that manifested themselves in a substantially weaker Rand. The decline in listed property prices was exacerbated by Growthpoint’s R2.5 billion equity raise, which was announced on 21 May 2013 and preceded much of the downturn in prices. Listed property companies have raised or announced their intention to raise approximately R10 billion in equity capital so far this year, having raised more than R30 billion in the preceding two years. The capital has been raised to fund incomeenhancing acquisitions and redevelopments, which should drive longer-term value creation. But, the quantum of equity issuance has satisf ied a signif icant amount of investor demand for listed property and exposed the sector to short-term volatility. Importantly, last month’s price action was not driven by a change in property fundamentals or a substantial change in the prospects for distribution growth. Investors can now invest in the listed property sector at a substantially higher initial yield (almost 7% at the end of 38 July 2013 SA Real Estate Investor May, from 5.9% at the end of April), but still expect distribution growth to average between 7% and 9% per annum over the next three years. However, investors should brace themselves for a bumpy ride in the short term. The increase in foreign ownership of South Africa’s largest listed property companies exposes the sector to significant volatility due to the short-term, opportunistic nature of these investments. Any deterioration in South Africa’s fundamentals and the resulting change in foreign investor sentiment would lead to further capital losses in the sector. Based on management guidance, the outlook for the rest of 2013 and 2014 has moderately deteriorated. Similar views have been expressed by retailers who have witnessed a slowdown in sales volumes, particularly among less affluent customers. This may put pressure on retail rentals in the medium-term, although most listed property companies expect to be able to push through modest growth in rents paid by their retail tenants. The office and industrial markets remain tough and most management teams expect little growth in market rentals over the medium term. Retaining tenants and filling vacant space in a tough leasing market has resulted in an increase in concessions, like rent-free periods. On a more positive note, the cost of debt capital is reducing as interest rates remain lower and more companies broaden their access to the debt capital markets. With interest rates expected to stay lower for longer, despite the increase in inflation, listed property companies with fixed debt maturing in the short term will benefit from the lower interest rate environment. The lower cost of capital available today presents an opportunity for listed property companies to undertake income-enhancing acquisitions, developments and redevelopments. Initial income yields on these projects are often more than 1% or 2% above the company’s cost of capital and create signif icant value for shareholders through an increase in the company’s income base. While the listed property sector is enjoying access to cheaper capita l, many private investors