Property: Consolidation and acquisition the major themes
In a f inancial world where risk and economic conditions change on a daily basis, rebalancing a portfolio to get the right asset class mix can be tricky. One asset class that has delivered year after year, and provided South African investors with solid returns, has been listed property, which delivered an exceptional 26.6% (capital 18.6%, income 8.0%) total return in 2014. This standout performance was driven by lower bond yields and strong property market fundamentals, which continue to persist in a low inf lation and rate environment.
“Last year saw listed property track bond yields lower for the most part and, given that the consensus for inflation has moderated, it seems that this sector still has some room to move,” says Nesi Chetty, head of Property at Momentum Asset Management. PROPERTY INVESTMENT OPPORTUNITIES IN 2015 The fundamental prospects for listed property look good in 2015. Retail property companies are still managing to obtain escalations rates of 7% to 8%. While we have seen some downward pressure on escalation rates from the large food anchors like Shoprite and Woolworths, the sector has not budged on setting high rates. Reversionary rental concerns in the office market have abated somewhat and we continue to see new office supply in most nodes. Key to office vacancies will be the rate at which new space is absorbed in nodes such as Sandton, Menlyn and Centurion. blowout. With low rent-to-turnover ratios (below 10%) in most super-regional centres, property companies do have the ability to pass these rising costs on to tenants. An inflection point will, however, occur when the rental burden is too much and the landlords get pushback from tenants. The slowing trading performance at Edcon is also a concern as the listed property sector’s exposure to Edcon on a space basis (gross lease area) is almost twice that of Ellerines and African Bank. CAPITAL RAISING IN 2014 The foreign earnings component of SA listed property has increased steadily and is now at 20% (growth in NEPI, Rockcastle and other companies has increased this foreign contribution). Last year was a bumper year for the listed property sector in terms of capital raisings. Close to R37bn was raised in various private placements, initial public offerings (IPO) and bookbuilds (most being oversubscribed by three or four times). MAJOR PROPERTY THEMES Consolidation and acquisition in the property sector will continue to be the major themes this year. Smaller property listings will look to bulk up on assets, in some instances overpaying for greater retail and office exposure. In the short term, this is likely to push property yields lower.
HEAD OF PROPERTY
Some new trends are emerging in the listed property space, with companies prepared to develop or gain exposure to the residential property sector. Normally the domain of residential heavyweight Octodec, companies like SA Corporate and Arrowhead are now making domestic property investment inroads.
The Momentum Propert y Fund continues to hold Growthpoint, Redefine, NEPI, Hyprop and EMIRA as its top stock picks and expects the listed sector to produce returns of between 10% and 13% for the full year.
The f und has now exceeded t he R1 billion assets under management mark and continues to be a top-quartile performer. “Having the right balance between domestic and offshore property was instrumental to the fund’s success last year. With quantitative easing in the US tapering, selecting property shares that benefitted from a yield re-rating paid off,” concludes Chetty.
SA PROPERTY SECTOR CAPITAL RAISING 2014 AT AN ALL-TIME HIGH