Let the good times roll

Lower va­can­cies, high build­ing costs driv­ing rental in­come

Finweek English Edition - - Companies & markets - JOAN MULLER

IT SEEMS THAT RIS­ING in­ter­est rates have done lit­tle to dampen in­vestor en­thu­si­asm for listed prop­erty stocks. It’s not all that sur­pris­ing though, con­sid­er­ing the bet­ter than ex­pected earn­ings re­sults an­nounced by a num­ber of coun­ters in re­cent weeks.

Funds re­port­ing dis­tri­bu­tion growth in ex­cess of 15% in­clude Growth­point, SA Cor­po­rate Real Es­tate, Re­silient, ApexHi and Free­stone. Later list­ings such as Hos­pi­tal­ity and Madi­son ex­ceeded fore­casts.

Some funds, no­tably those that have been in­volved in cor­po­rate ac­tiv­ity, have also recorded dou­ble digit cap­i­tal growth since the be­gin­ning of the year. The sec­tor’s mar­ket cap (ex­clud­ing Lib­erty In­ter­na­tional) touched on R90bn last week, up from around R60bn two years ago.

So listed prop­erty in­vestors are sit­ting pretty, both in terms of in­come and cap­i­tal growth.

The ques­tion, of course, is whether there’s still value to be had. And how long will in­vestors con­tinue to see their in­come pay­outs rise at dou­ble-digit rates?

In­dus­try com­men­ta­tors be­lieve that the mar­ket could steam ahead un­til 2010.

An­gelique de Rauville, CEO of In­vestec Listed Prop­erty In­vest­ments, ex­pects av­er­age dis­tri­bu­tion growth of be­tween 10% and 12% for both 2007 and 2008. She says this fig­ure could even rise to around 15% this year, which means that the listed prop­erty sec­tor could match last year’s to­tal re­turns of 28%.

De Rauville states that strong growth in de­mand for build­ing ma­te­ri­als and skills on the back of Gov­ern­ment’s in­fra­struc­ture spend­ing pro­gramme should con­tinue to push up build­ing costs, mak­ing it less vi­able to build new com­mer­cial prop­erty.

FNB prop­erty strate­gist John Loos ex­presses a sim­i­lar sen­ti­ment. He says ac­cel­er­ated Gov­ern­ment in­fra­struc­ture spend­ing cre­ates a recipe for “fan­tas­tic” re­turns on com­mer­cial prop­erty go­ing for­ward as ad­di­tional pres­sure on build­ing costs will con­strain the sup­ply of new com­mer­cial prop­erty.

Leon Al­li­son, prop­erty an­a­lyst at Mac­quarie First South Se­cu­ri­ties, has a slightly less bullish out­look but still ex­pects to­tal re­turns of around 15%/year over the next three years.

The scrap­ping of tax on re­tire­ment funds’ in­ter­est in­come in last month’s Bud­get will also make listed prop­erty more at­trac­tive rel­a­tive to eq­ui­ties.

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