But good buying opportunities for cash buyers
THERE’S NO DENYING property , like most other asset classes, has had a rough ride this year. And as long as uncertainty prevails worldwide about the credit crisis and recessionary fears, property markets will remain under pressure. Globally, the biggest issue currently affecting both commercial and residential real estate markets is access to credit – rather, the lack thereof. As banks continue to battle with liquidity problems, investors and property owners are finding it increasingly difficult to trade or grow property portfolios.
South Africa hasn’t been left unscathed by that trend, although our property market still appears to be holding up better than many of those overseas. For example, British research group Capital Economics expects house prices in Britain, Ireland, Spain and Australia to fall by at least 40% by end-2009 (from their 2007 peaks). By contrast, most SA property analysts don’t expect average house prices to dip by more than 10% on average. Even though sales volumes have plummeted to record lows, most SA housing indices are still recording positive growth – albeit in the low single digits.
Similarly, SA’s listed property sector and directly held commercial buildings appear to be weathering the storm somewhat better than in other countries. Britain’s listed property index has slumped by 25% since mid-2007, while property stocks in Australia, the United States and parts of Europe have seen even bigger losses.
The latest monthly overview of Cape-based Catalyst Fund Managers shows SA’s listed property index (SAPY) recorded a negative total return of -17,71% between January and October this year. The past few weeks have been particularly volatile amid increased concerns about the possibility of a global recession.
André Stadler, MD of Catalyst Fund Managers, says the current pricing of global listed property stocks reflects a very bearish economic outlook, coupled with forced selling resulting from liquidity constraints. Stadler says the outcome is that historic dividend yields for global listed property (as measured by the UBS Global Investors’ Index) are running at 7,55% on average. That’s 3,65% ahead of the country’s weighted average 10-year Government bond yields.
Stadler says that’s created some excellent buying opportunities both offshore and in SA. Stadler notes investors can now buy JSE-listed property stocks at a forward average yield of around 10,9%. That’s attractive compared to other income investments, particularly given income payouts (distributions) on listed property are still growing at double-digit rates. Stadler says the latter is the main difference between property and other income investments. “The income on property grows, whereas the income on cash and bonds does not.”
Stadler refers to the four property companies that announced earnings in October: all declared income growth of more than 10% – Fountainhead (12,1%), Premium (13,1%), Redefine (10,5%) and Octodec (15,4%). He adds the market consensus is that distribution growth will remain around the 10% level over the next 12 months.
Coronation Fund Managers property analyst Anton de Goede says although the relative value proposition of listed property compared to other asset classes dropped since the beginning of July 2008, there’s still plenty of long-term value to be had.
De Goede says: “Listed property is one of the few asset classes where a solid revenue base is in place due to contractual lease agreements. In addition, lease agreements have annual escalation rates, resulting in a natural inflation hedge over the long term. The revenue base can only go backwards if leases up for renewal are signed at lower than current rental levels or, if not renewed, the subsequent vacant space isn’t filled.’’
De Goede says one risk for property is that bond yields could come under pressure due to, among other factors, rand weakness. An increase in vacancy levels would also impact negatively on future distribution growth. However, he maintains that the current capacity strain in the construction sector should see limited new commercial property developments coming on stream over the next few years, which should keep a lid on vacancies.
De Goede says with volatility in global equity markets likely to persist over the short term, investors should use periods of share price weakness to selectively start increasing their exposure to listed property.
Kundayi Munzara, head of Investec Property’s research team, agrees the short-term outlook for distribution growth remains positive. Says Munzara: “A key positive for the commercial property industry is that development activity has slowed down significantly, which reduces the probability of oversupply.”
However, Munzara expects a slight deterioration in property fundamentals as some tenants, particularly in shopping centres, take strain. He says retail vacancies are likely to move out to the 5% region, with industrial property continuing to outperform offices and shopping centres.
Vukile Property Fund CE Gerhard van Zyl holds a similar view. He says although confidence is low and the current economic environment generally unfavourable, investors should find comfort in the fact commercial property fundamentals remain fairly sound. “The biggest plus factor the commercial
André Stadler Double-digit income growth intact.
Andrew Golding Bargain buys coming to the fore.
Gerhard van Zyl Shortage of stock underpinning rentals.