Property index bounces back
After a dismal first quarter, the property index became the best asset performer in April. With a total return (capital appreciation and dividends) of 7.68%, it outperformed equities (5.4%), cash (0.62%) and bonds (-0.68%). But the index has a long way to go as it is still down 18% for the year. /
After a dismal first quarter, the property index became the best asset performer in April.
With a total return (capital appreciation and dividends) of 7.68%, it outperformed equities (5.4%), cash (0.62%) and bonds (-0.68%). But the index has a long way to go as it is still down 18% for the year.
“However, on a rolling 12month basis, the property sector’s total return is slightly shy of breakeven at -0.45%,” said Catalyst Fund Managers property analyst Naeem Tilly.
Resilient’s troubles were the main drawdown for the sector in the first quarter. An independent report commissioned by Resilient found no foul play in terms of insider trading or market manipulation. The market remains unconvinced, however, with Resilient still down 61% in 2018. Fortress B is down 62%, Nepi Rockcastle 37% and Greenbay 47%.
There has been some recovery as, in April alone, Resilient rebounded 35.5%.
Tilly said the report provided a degree of comfort. “But we continue to err on the side of caution and await the Financial Services Board and JSE’s pending investigations into Resilient,” he said.
Whatever the outcome, Resilient shares are in extreme value territory, with the discount in its share price to net asset value at about 40%. Fortress B could be even more of an investment case with a discount of 50%.
Other issues continue to affect the sector, including Rebosis CEO Andile Mazwai’s unexpected resignation and Hammerson’s decision to walk away from its intended takeover of Intu. Some shareholders were unhappy about how Hammerson management reacted to the second offer from French retail group Klépierre.
Hammerson’s share price jumped on Klépierre’s offer, at a 40% premium to Hammerson’s share price.
Hammerson is up 4.3% in 2018 but Intu has lost 19.7% over the same period.
The big advantage of investing in property is that investors still win even though share prices may fall because any real estate investment trust (Reit) is obliged by law to pay out 75% of earnings in dividends to shareholders.
Stanlib retail investment director Paul Hansen points out that despite the big fall in 2018, the income or dividends of property companies are still growing at an average of 6% a year. Over the past 16 years, the property index has delivered an average return of 20.3% every year, including this first quarter’s retreat.
Dividend growth has proven to be much more important than share price growth.
In the 11 years to the end of 2016, the income return from dividends was 301% and the capital return 138%.
The rally in property shares coincided with the bull market in bonds, with global bond yields reaching record lows as prices rose in a stimulatory monetary environment.
Rising bond yields may present the most important challenge for property stocks in the future. As bond yields decline, prices rise, presenting a strong correlation with the property sector’s bull run. The reverse may become reality, however, with global bond yields on the rise.
Local yields, however, have declined, with the benchmark 10-year now at about 8.3%, after dipping below 8% in March, from 13% in 2002. But analysts remain positive.
“Though yields have increased across the board in emerging markets, South African yields remain attractive and among the highest in the world,” said Old Mutual MultiManagers analyst Dave Mohr.
The US 10-year treasury bond rose above 3% in April but since then it has traded below 3% again, which is an indication that the market is holding the US Federal Reserve to its word that it is committed to gradually increasing rates.