Time to cherry pick

Finweek English Edition - - Property - JOAN MULLER joanm@fin­week.co.za

AL­THOUGH IN­VESTORS climbed back into listed prop­erty in a big way last month – the in­dex gained around 14% in July – in­dus­try play­ers aren’t ex­pect­ing the sec­tor to con­tinue to de­liver the same su­per re­turns seen over the past three years. That means in­vestors will have to be­come far more dis­cern­ing in their stock choices.

Ma­ri­ette Warner, MD of Corovest Prop­erty Fund Man­agers, who pre­vi­ously headed Stan­lib’s listed prop­erty di­vi­sion, says in a rag­ing bull mar­ket you can buy any­thing and

earn im­pres­sive re­turns but when the mar­ket’s down that no longer ap­plies. Warner ex­pects the earn­ings gap be­tween the sec­tor’s 24 coun­ters to widen no­tice­ably over the next six to 12 months. In fact, the mar­ket is al­ready pric­ing in a wider dif­fer­en­ti­a­tion in sus­tain­able earn­ings growth.

That’s clearly il­lus­trated by Warner’s cal­cu­la­tions, which show how the yield spread of a bas­ket of the high­est and low­est yield­ing prop­erty stocks has widened since the be­gin­ning of Novem­ber 2007. Warner’s fig­ures show the yield dif­fer­en­ti­a­tion rose from 280 ba­sis points in Novem­ber to 415 ba­sis points on 24 July this year. She ex­pects the yield spread to widen fur­ther over the com­ing months as in­vestors start be­com­ing in­creas­ingly se­lec­tive.

Warner says al­though growth prospects for listed prop­erty re­main pos­i­tive there’s no doubt the sec­tor’s earn­ings mo­men­tum has slowed. She ex­pects earn­ings growth to re­main at cur­rent lev­els for the more de­fen­sive port­fo­lios. Low va­can­cies and high bar­ri­ers to new de­vel­op­ments will sup­port earn­ings as long as GDP growth re­mains in pos­i­tive ter­ri­tory.

But Warner says the ex­cep­tional level of growth seen last year isn’t ex­pected to con­tinue, as the cur­rent trad­ing and in­ter­est rate en­vi­ron­ments are now very dif­fer­ent. “Over the past few years the high­est re­turns were gen­er­ated from favourable trad­ing con­di­tions. In fu­ture the high­est re­turns will be gen­er­ated by solid port­fo­lio fun­da­men­tals and as­tute prop­erty as­set man­age­ment.”

Warner says the ques­tion isn’t so much which stocks to pick but rather which ones to avoid. In her opin­ion the lat­ter in­clude those funds that pay out trad­ing prof­its as part of their dis­tri­bu­tion. She main­tains that prac­tice is too risky in a high in­ter­est rate en­vi­ron­ment and doesn’t serve to pro­tect wealth.

Funds with a high ex­po­sure to older re­tail port­fo­lios in less than prime lo­ca­tions are also vul­ner­a­ble. Warner says dom­i­nant re­gional shop­ping cen­tres are more re­silient when con­sumer spend­ing slows than their smaller, sec­ond-tier coun­ter­parts.

Fig­ures from In­vestec Prop­erty In­vest­ments show earn­ings growth re­ported by listed prop­erty funds so far this year has ranged from a low of 8,3% to a high of 20,6%. The av­er­age dis­tri­bu­tion growth for first half 2008 (on a mar­ket cap weighted ba­sis) is 13,6%.

In­vestec Prop­erty In­vest­ments CEO An­gelique de Rauville’s dis­tri­bu­tion growth fore­casts show that the top five per­form­ers for 2008 in­clude Hos­pi­tal­ity B (+17,9%), Pre­mium Prop­er­ties (+16,6%), Acu­cap Prop­er­ties (+16,2%), Re­silient Prop­erty In­come Fund (+16%) and Oc­todec In­vest­ments (+15,3%).

The five worst per­form­ers in terms of growth in in­come pay­outs are ex­pected to be SA Cor­po­rate Real Es­tate Fund (-4,5%), Hos­pi­tal­ity A (5%), ApexHi A & B (5%), iFour Prop­er­ties (8,3%) and Sy­com Prop­erty Fund (8,3%). The mar­ket will no doubt keep a close watch on how dis­tri­bu­tion growth lev­els are hold­ing up when listed prop­erty funds de­clare earn­ings over the next few weeks for the June re­port­ing pe­riod.

Earn­ings growth gap to widen. Ma­ri­ette Warner

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