Real Estate Investor Magazine South Africa March 2014 | Page 42

FINANCE

BY IAN ANDERSON

The predicted outcome

Listed property and rising interest rates

T

he Sout h A f r ica n Reser ve Ba nk
(SARB) surprised market participants
when it raised official interest rates by
50 basis points at the conclusion of its January
Monetary Policy Committee meeting. The
SARB highlighted risks to the inf lation
outlook, on the back of further rand weakness,
as a primary motivating factor in reaching its
decision, although the decision itself was not
unanimous.
Much like Pavlov’s dogs, investors in the listed
property sector have been conditioned to sell
their investments when official interest rates rise
and the sector duly declined by almost 3% in the
space of two days after the announcement.
Although that doesn’t seem like much, it needs
to be viewed in the context of the 18.5% decline
in listed property prices in the nine months
preceding the SARB’s surprise announcement.
All told, the prices of listed property companies
in South Africa have declined on average by
more than 20% since the US Federal Reserve
announced it was considering reducing its bond
purchase programme in May last year.
At the same time, distribution growth, which
remains the primary driver of long-term capital
growth, has been accelerating and is expected to
average 8% in 2014 and 2015. The combination
of higher income levels and lower prices has
seen a marked increase in the forward yield of
the sector, which has increased almost 200 basis
points to the current level of 8.2%.
While a 50 basis points increase in official
interest rates is unlikely to have an impact on
longer-term distribution growth prospects,
interest rates are expected to continue rising
throughout 2014. The magnitude and frequency
of rate hikes could well determine the fortunes
of the listed property sector during 2014.
If, as expected, the SARB is circumspect in
its approach to raising official interest ra