Now for the next wave

Huge up­side in SA’s pos­si­ble in­clu­sion in pres­ti­gious global in­dex

Finweek English Edition - - Property - JOAN MULLER

IN­VESTORS CON­TINUE TO pile back into the JSE’s real es­tate sec­tor fol­low­ing the ma­jor sell-off be­tween May and Au­gust last year, which drove share prices of some funds up by more than 40% in first quar­ter 2007.

The strong up-tick in de­mand for listed prop­erty stock in re­cent months has sur­prised even the most bullish of in­dus­try com­men­ta­tors. And it seems that there’s more to come, par­tic­u­larly if in­ter­na­tional pun­ters start en­ter­ing South Africa’s high yield­ing listed prop­erty sec­tor.

The bet­ter-than-ex­pected per­for­mance of prop­erty stocks since Jan­uary has al­ready prompted one an­a­lyst to up­grade his growth fore­casts. Mac­quarie First South Se­cu­ri­ties prop­erty an­a­lyst Leon Al­li­son last week changed his out­look for listed prop­erty from neu­tral to out­per­form. He ex­pects con­tin­ued strong in­flows into the sec­tor over the next three years – not least from for­eign in­vestors, given that healthy prop­erty fun­da­men­tals such as low va­can­cies and new sup­ply con­straints should per­sist un­til at least 2010.

Al­li­son fore­casts to­tal re­turns of 16% over the next 12 months and 34% in the next 24 months (cu­mu­la­tively). His dis­tri­bu­tion growth fore­cast is up from 10,6% to 12,7% and in year two from 9,6% to 11%.

Al­li­son’s top pick is sec­tor heavy­weight Growth­point, which he es­ti­mates will de­liver to­tal re­turns of 29% over the next 12 months. Other stocks likely to out­per­form over the next 12 months in­clude Emira (23%), Hyprop (18%), Hos­pi­tal­ity B (18%) and Sy­com (18%). Al­li­son con­cedes that his fore­casts may be on the con­ser­va­tive side. More so if off­shore fund man­agers start en­ter­ing the fray on a mean­ing­ful scale this year.

Al­li­son says while for­eign­ers own be­tween 20% and 50% of many of the gen­eral eq­uity sec­tors on the JSE, less than 5% of listed prop­erty is in for­eign hands. That sce­nario could change markedly if SA’s listed prop­erty sec­tor man­ages to se­cure a spot in the high profile FTSE EPRA/NAREIT global real es­tate in­dex later this year. Ap­par­ently, EPRA/NAREIT re­searchers will vote in June on whether to in­clude sev­eral new coun­tries in those in­dexes, in­clud­ing SA.

Al­li­son says SA has a good chance to be in­cluded in the global bench­marks, given that in­ter­na­tional re­search sur­veys – such as the Jones Lang Lasalle Real Es­tate Trans­parency in­dex – last year rated SA 13th out of 56 coun­tries in terms of trans­parency. SA is rated bet­ter than 15 coun­tries (more than half) that are al­ready in­cluded in the EPRA/NAREIT in­dex.

Al­li­son says SA re­mains one of the world’s most at­trac­tive mar­kets in terms of in­come, as it of­fers higher yields than any of its in­ter­na­tional coun­ter­parts.

Mike Flax, di­rec­tor of Madi­son Prop­erty Fund Man­agers, echoes this sen­ti­ment. He says there’s no doubt that in­ter­na­tional as­set man­agers are start­ing to sit up and take no­tice of SA’s high-yield­ing listed prop­erty stocks as the global search for in­come yield in­ten­si­fies.

Ma­jor as­set man­agers have in fact al­ready hit town in search of rel­a­tively high yield­ing listed prop­erty shares. Says Flax: “Com­pa­nies such as Cadil­lac Fairview of Canada, CSFB, Henderson’s Global, Franklin Tem­ple­ton and other well-known play­ers in the listed real es­tate space have started to dip their toes in the wa­ter and are look­ing at build­ing size­able stakes in the larger, more liq­uid, SA prop­erty stocks.” Th­ese in­clude the likes of Growth­point, Hyprop and Re­de­fine.

Apart from the ex­pected in­flow of money from in­vestors over­seas, share prices of prop­erty stocks will be fur­ther sup­ported by on­go­ing cor­po­rate ac­tiv­ity. An­dré Stadler, MD of Cat­a­lyst Fund Man­agers, says pro­posed takeover deals such as that be­tween the PIC and Cape-based CBS cre­ate huge de­mand pres­sure.

If CBS share­hold­ers ac­cept PIC’s cash of­fer of R12/share, some R1,6bn in cash will need to be rein­vested in other prop­erty stocks. Stadler says PIC’s takeover bid has al­ready buoyed the share price of CBS, which de­liv­ered to­tal re­turns of 30% in first quar­ter 2007 com­pared to the in­dex’s to­tal re­turn of 16%.

Other top per­form­ers in the year to date were Hos­pi­tal­ity B and ApexHi C (see re­port page 46). Both fetched to­tal re­turns of 51%. Stadler says the main per­for­mance driver of Hos­pi­tal­ity B and ApexHi C was the ex­pec­ta­tion of higher than an­tic­i­pated dis­tri­bu­tion growth, un­der­pinned by rel­a­tively high gear­ing.

Ac­cord­ing to Cat­a­lyst fig­ures, the worst per­form­ers in first quar­ter 2007 were Calulo (-0,54%), Siy­a­thenga (2,26%) and ApexHi B (4,8%).

Stronger for longer. Leon Al­li­son


Source: Mac­quarie Re­search, April 2007

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