Real Estate Investor Magazine South Africa October 2015 | Page 51

SA faces a number of headwinds and economic growth is likely to continue
to disappoint in the short term. In this environment, the opportunity to
access growth via offshore diversification, yield accretive transactions
and management expertise in sweating assets is valuable and demands
a premium. Few other investments, whether locally or globally, offer the
attractive combination of a high initial yield, as well as income and capital
growth that property does.

rates can provide yield enhancement on equity.
However, the growth potential of these investments is
generally lower than in SA, given the very low inflation
environment.
A further diversification to the SAPY is the
inclusion of development companies, Attacq and
Pivotal, which now make up 6% of the index. These
companies earn development profits, as well as rental
income on their portfolios. However, they do not
distribute income to investors, but reinvest the income
into new developments, boosting capital growth. The
effect on the SAPY is an unwitting reduction in the
overall income yield.
In the past two years, listed property has become
more expensive relative to long bonds for a number of
reasons. The search for yield with good growth gives
listed property a material advantage over bonds, while
effect quantitative easing on local property yields,
as cheap money floods the market, has been evident.
Given that the local property market is relatively
well hedged in terms of debt over the medium term,
www.reimag.co.za

a sovereign rating downgrade would affect the bond
market more significantly. However, the current
premium of 31% that listed property trades over
long bonds has sounded alarm bells with market
commentators decrying listed property valuations. The
increased weight of foreign property investments and
new development companies in the SAPY requires a
reconstitution of the composition of the index when
comparing historical perspectives.
When offshore and development holdings are
excluded from the SAPY, the net result provides a
clearer understanding of the actual yield being achieved
on local property. The forward yield on the property
sector increases from 6.1% to 7.1%, resulting in a 1.1%
spread (or a 13% premium) to the bond yield. This
means investors are paying for 24 months additional
income growth upfront, which seems reasonable in
an investment world searching for income yield and
growth in income.

RESOURCES
metopegroup.com
OCTOBER 2015 SA Real Estate Investor

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