Real Estate Investor Magazine South Africa June 2014 | Page 44

SMART MOVES

BY IAN ANDERSON

REITS All The Way
Reasons why you should invest in listed property

S

ince May last year, South Africa’s listed
property sector has been under the spotlight
for all the wrong reasons. Share prices fell in
response to higher bond yields and the prospect of
higher official interest rates.
Since the South African Reserve Bank raised interest
rates by 0.5% at the end of January, the sector has
staged a strong and unexpected recovery, returning
more than 12%. The recovery can be attributed to
strong distribution growth from companies that have
reported recently, a stronger rand and lower global
bond yields.
While listed property prices have been volatile since
May last year, there are still a number of compelling
reasons for investors to include exposure to listed
property in a balanced portfolio.
First and foremost, listed property provides investors
with a high level of income. Although the forward yield
on the sector has declined from more than 8% at the
end of January to the current level of 7.3%, it remains
significantly higher than the yield on cash and most

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June 2014 SA Real Estate Investor

money market instruments. It is lower than the yield on
the longer-dated bonds, but that yield differential reflects
the second benefit of investing in listed property.
The income from listed property grows at or above
inflation over time. Right now, income growth from the
sector as a whole has accelerated to more than 9%. This
growth rate, while probably not sustainable in the long
term, is a reflection of the significant changes made in
the sector over the past 10 years, which culminated in the
introduction of Real Estate Investment Trusts (REITs)
last year.
SA REITs grow their income through contractual
rental escalations from existing leases (usually between
7% and 9% per annum), signing new leases on vacant
space, re-letting space when leases expire and increasing
revenue through developments and redevelopments. By
introducing gearing (i.e. borrowings to fund property
purchases), income growth can be enhanced through
prudent interest rate management. Typically, SA REITs
maintain debt to asset ratios of between 2 H[