There are likely to be good chances to buy listed property on higher yields
You can use volatility to your advantage
In mid-2013 in this column I discussed the relationship between the R186 government bond yield and the JSE-listed property sector. I highlighted that bond yields had broken higher and that the listed property sector had broken lower.
We have seen a very similar scenario unfold this year and the whole setup between the two charts looks very similar to how it looked in 2013. Bond yields move inversely to price — when yields go up, bond prices fall and vice versa. Listed property tends to track the performance of the bond market closely, as listed property is also treated as an interest-bearing asset to a certain degree as there is a fair amount of tracking between property yields and the “risk-free” yields that can be obtained on government bonds.
As was the case back in 2013, there was much speculation about the possibility that US interest rates would start to increase and that was reflected in a rise in US 10-year treasury yields. On that occasion there was a global bond market sell-off and emerging market bonds suffered the brunt of the selling pressure. The R186 government bond yield went from 6,6% to 8,5% within three months and listed property suffered a sharp sell-off.
As it turned out, the market was anticipating a rise in US interest rates. Now, two years later, US rates have still not increased as the Federal Reserve has held its accommodative monetary stance. However, we again find ourselves in a situation where there is a great deal of speculation that US rates will start to increase before the end of 2015 and US bond yields have begun to rise to reflect that anticipation.
As before, emerging market bond markets have again come under pressure following the rise in US yields and we have seen the yield on the R186 government bond rise from 7% in January to the current level of around 8,3%. Technically the break of the downtrend in the R186 yield in April through the 7,9% level is significant and points to further rising in the yield.
There is also an inverted head and shoulder pattern evident on the yield which projects up to a target of 8,9%. That would equal the highest yield that was achieved for the R186 in January 2014. While this is the case in the bond market, it is not surprising to see a marked deterioration in the performance of the JSE-listed property sector. The sector has broken the uptrend that began in early 2014. This happened at around the same time as the yield on the R186 broke its trend. Given that the yields on SA government bonds are a good indication of what to expect in the listed property space, the higher yield projection for the R186 government bond is suggestive of further softening in the prices of listed property on the JSE. The technical break weaker for the listed property sector of the JSE in 2013 saw the sector lagging for around a year after the technical break. It would not be surprising to see a similar performance for listed property again in coming quarters. There is no rush to buy listed property while this is the case. Volatility is likely to be with us for a while, as it was in 2013. Significant weakness in the listed property space will provide income investors with an opportunity to buy listed property at a reduced price and with a decent yield. Look to use this volatility to your advantage in the coming quarters if you’re in the process of building an income portfolio because there are likely to be some good opportunities to buy listed property on higher yields than what is currently available.