Real Estate Investor Magazine South Africa May 2014 | Page 53

COMMERCIAL
possibility of lower increments (25 basis points instead
of 50 basis points). Bond yields in the US also fell from
their recent highs, as forecasts for global growth were
downgraded. The listed property sector also responded
positively to these developments, posting strong gains
at the end of March and in early April.

The sector has made a habit of bouncing quickly off
its lows when the SARB unexpectedly raises official
interest rates. In 2001, 2006 and 2008, the listed
property sector in South Africa declined by more than
20% when the SARB surprised markets and raised
interest rates, either to defend the currency or curb
higher inf lation. On all three occasions, the sector
recovered quickly and investors who were able to time
the bottom correctly made significant capital profits.
More importantly, they were able to secure highly
attractive yields on their initial investments and have
enjoyed growth in that income in excess of inflation.

By the end of January, investors were able to secure
initial income yields in excess of 8.3%, which is highly
attractive given that the SARB has a targeted inflation
band of between 3% and 6%. Investors therefore
secured an initial income yield of more than 2% above
the upper limit of the inflation target range and are
now enjoying growth in that income stream of a similar
magnitude. That should produce long-term returns of
between 15% and 20% per annum in the medium and
long term.

For income-dependent investors, or those investors
with living annuities, an 8% initial yield and 8%
distribution or income growth would go a long way to
secure a fruitful and relatively stress-free retirement.
Instead, most investors concerned about shorter-term
price volatility would either not have invested or, if they
were already invested in listed property, would have
been encouraged to sell, given the negative publicity the
asset class received throughout the second half of 2013.

Listed property is a long-term investment that
produces a high level of initial income and grows that
income above inf lation over time. It also produces
capital growth in excess of inflation over longer periods,
a function of the growing income steam. These are
highly desirable characteristics for investors saving for
www.reimag.co.za

retirement or living in retirement. The investment is
also underpinned by real assets that appreciate in value
over time.

If interest rates in South Africa rise more slowly
than forecast and global bond yields remain lower for
longer, the listed property sector should be well on the
way to recovery.
However, most forecasters are predicting upward
pressure on global bond yields for the remainder of
the year as monetary stimulus is slowly withdrawn by
central banks around the world. This will place upward
pressure on listed property yields, resulting in further
price volatility. Given the acceleration in distribution
growth rates, any pullback in prices should be viewed
as a buying opportunity.

“If interest rates in South Africa
rise more slowly than forecast and
global bond yields remain lower
for longer, the listed property
sector should be well on its way
to recovery.”

The current one-year forward yield on the sector as a
whole, excluding non-REIT Attacq, is 7.3%. It may rise
again towards 8% if bond yields start rising and investors
will then get the chance to secure a highly attractive initial
income yield well above inflation, with the prospect of
inflation-hedged income and capital growth over time.
But even at a yield of 7.3%, the sector looks attractively
priced, given the higher distribution growth forecast over
the medium term.

For investors with long investment horizons, an
investment in listed property today will provide inflationbeating returns in the medium and long term, as well as
diversification benefits in a multi-asset portfolio.

REALE ESTATE BUSINESS DIRECTORY

RESOURCES

Grindrod Asset Management
May 2014 SA Real Estate Investor

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