Real Estate Investor Magazine South Africa June 2013 | Page 44

LISTED

BY IAN ANDERSON

THE BEST OF BOTH WORLDS
High income yield & long-term capital

S

outh Africa’s listed property sector
gained 7.4% in April and is now up 17.2%
since the start of the year. The sector has
rallied since June last year, posting a return of
42.9% and significantly outperforming both the
bond and equity markets in South Africa.
An investment in listed property offers
investors three key benefits: a high starting
income yield, inflation-hedged income growth
and, as a result, inf lation-hedged capital
growth over longer investment horizons. The
relationship between income growth and
capital growth is important and has often been
overlooked by investors when assessing the
merits of an investment in listed property.
If an investor only focused on initial income
yields when comparing the attractiveness of South
Africa’s higher yielding asset classes, the small
pick-up in initial income yield from listed property
would appear insufficient when compared to the
risks associated with an investment in property.
But the income an investor receives from their
listed property investment will grow over time
and as a result, the capital value of their investment
will show a similar level of growth.
Listed property therefore offers investors the best
of both worlds: a high income yield comparable to
bonds and long-term income and capital growth,
similar to equities. As official interest rates and the
yields on bonds and listed property have reduced
to historically low levels, the growth characteristic
has taken on more significant proportions.

42

June 2013 SA Real Estate Investor

The current one year forward yield on South
Africa’s listed property sector is now just
6%. Given the significant changes that have
occurred in the sector over the past decade,
most companies are capable of growing their
incomes above inflation (those changes include
higher gearing levels, access to multiple sources
of capital, improved property portfolios and
internalised management teams). This suggests
that from this point, more than 50% of the longterm return from listed property will come from
capital growth (a function of income growth).
However, in the short-term, capital values are
influenced by other factors, most noticeably the
change in bond yields. A significant portion of
the 40%-plus return generated by the market over
the past year has come from listed property yields
following bond yields lower. In April, bond yields
fell by more than 50 basis points (0.5%). The yield
on listed property fell by a similar level, resulting
in prices rising more than 7%.
Lower bond yields are pricing in the prospect
that central banks, incl Y[??H??]Y??X?[???\?\??H?[???[?]??X?X[[?\?\??]\??\?\?\?[???L?]8?&\?X\?H??Z[H?\?B?????\?[?\?\??]\?[?[????[??Y\??]?[??H?????[?X???ZX?X?]?]H[???\??[??][??]?[H??]Y??X?H?\?\???YH??H??8?&\??????[\??\?[??][??]B?\??[??[?????H?H\\?[??H\??]Y??[??H[?\?Z?[H?[?HX??H
?H\?[?H\?]X\?\??\?X^HYX[?]??]?Y??X?H?\??&]????HXY?H]\??X[????[??[?[??[?X[?H?\??[??[?[???\??[?H???X???\?Y[?\?\??]\?[?X^K???]?\?HX\??]?[Y]?\?\?x?&\?]X\?H
L H?[??H]H[?]\?H?X?B???[Z]YH?[??H??][?\?\??]\?]?Z]\?HX^H??[HYY][???[?H??]\?K??]Y??X?x?&\?\?Y???\?H?X??X^H?H?[?\?X?H?[??X\?[????ZY[?Y?[??][??[XZ[??[]?]Y[??H??]Y??X?[??\?\??H?[???\??&]?]???X?X[[?\?\??]\?????H?[[??X??]?[??X\?[??[?\?\??]\?X\?H[??M?\???[??\?[[???]\?H?\][???\?[???X?B??\H?][???H\?YX\??&\?[\?\??]?H?X?B??Z[??]8?&\?\?Y??H???\??\?[??]X[?B??[?X[?Y?\??\?H\??Z[???\??[???X??]B???]\?H???X????\?Y??\?K????]?\?????]\?H[??\???\?Y???\?H??[?Y\????\?[?]?X?]?H[???YB?ZY[
?[]]?H??\?\??]?\??\?[???]?Y??X?JK[?H?[?X[????]\?H?\][??Z[??[?^?\???[??][??]8?&\?HYX[\??]??\????[??\??????]?[?????]\?[Y[??[?[?XYH[??]\?[Y[???[???]\?[Y[??[??\???\?HX?H??Z[??\?H[???YH[??[??\??]?\???]????\?X?\?\?X??\?X?B????[??Z\??\][?\?K?[??]\?[Y[??[??\???\?HX?H?[???HHY?]?[?[???YB??[]]?H??\?\??]?\??\?H8?$?[????[??][???YH??X[H[?^?\???[??][?????T??T??T??[???\??]X[?Y?[Y[?????˜?Z[XY????B??