Un­cer­tainty pre­vails

But good buy­ing op­por­tu­ni­ties for cash buy­ers

Finweek English Edition - - Portfolio Punts -

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.

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