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
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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