Let the good times roll
Lower vacancies, high building costs driving rental income
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.