Value in local listings

Investors may have a limited window of opportunity to buy Sa-focused property stocks at record dividend yields

Though there has been something of a recovery in property share prices in recent weeks after three months of negative returns, the sector is by and large still looking rather cheap.

This is particularly true for property stocks that generate all or most of their earnings in SA, with at least a dozen local counters now trading at dividend yields north of 10%.

That’s attractive compared with the average 6%-7% that income-dependent investors are getting on cash in the bank, or the just more than 8% on offer from government bonds.

In fact, the yield spread between government bonds and Sa-focused property stocks is the highest it has been in 20 years, says Bridge

Fund Managers chief investment officer Ian Anderson. Despite the 15%-18% recovery recorded in the year to date by the likes of Accelerate Property Fund, Octodec Investments, Emira Property and Indluplace Properties, Anderson says most local property counters still offer significant value relative to bonds and equities. Many are trading at sizeable discounts to NAV.

“[Property] is probably the only Sa-focused sector on the JSE that has not responded positively to the improved political and economic backdrop and recent interest rate cut,” he says.

This is probably because investors have focused on what has been happening to headline indices such as the SA listed property index, which has been dragged down by the sharp sell-off in Resilient stable shares, as well as some offshore counters, says Anderson.

The index is down more than 14% in the year to date.

Anderson refers to the price declines in the Resilient stable and the ensuing uncertainty around the group’s distribution (or dividend) growth numbers. “That has spooked investors who would otherwise have increased allocations to listed property — specifically Safocused stocks,” he says.

He notes that the stronger rand and headwinds faced by offshore property markets are also making would-be investors nervous, given the dominance of rand-hedge counters in the JSE real estate sector.

“These factors have created a unique buying opportunity for investors,” says Anderson.

Kelly Hook, investment analyst at Metope Investment Managers, agrees that local property stocks are poised to benefit from the wave of positive sentiment that has swept across SA since the ANC’S December conference and the subsequent election of Cyril Ramaphosa as SA president.

Equally encouraging, says Hook, is that many property funds have rebased their dividends to more sustainable levels.

She refers to a worrying trend last year of companies boosting their dividend growth numbers through lower quality, one-off income sources such as trading and capital profits, underwriting or development fees, and foreign exchange gains.

“Poorer quality income, even if sustainable, dilutes the investment case and takes away from pure property income,” says Hook.

Several funds have now “washed out” these