Listed property still the one to beat Stanlib’s Keillen Ndlovu discusses why this asset class has retained its position at the head of the pack.
growth in this sector is slowing down significantly but it continues to pip all other asset classes. Demand for listed property has been supported by, among other factors, a search for yield, strong mergers and acquisitions activity, new listings, diversification into offshore markets, and better-thanexpected earnings growth. Offshore property assets now make up about 40% of the South African Listed Property Index.
Leon Kok spoke to Stanlib head of listed property funds, Keillen Ndlovu, about the sector’s prospects:
Is the listed property party over in SA?
Although current market performance is nothing like it has been during the past decade, it certainly isn’t sinking into oblivion. Annualised capital appreciation is down considerably, but earnings are still holding up. It remains the bestperforming asset class in SA in the year-to-date and over the years.
What do you put this down to?
Property income growth has slowed down due to the more depressed economy, but this has been significantly offset by diversification into developed markets such as UK, Europe and Australia as well as the rest of Africa.
Will the domestic listed property sector be able to hold up in the current low growth economic environment?
Yes, I believe so. It is considerably more defensive than equities and has shown just over 20% compound growth during the past 15 years and is currently growing at around 8% this year. However, most of this is income-driven with only limited capital growth. Earnings have never been negative since 1994.
When times are tough, businesses cut down on spending, but one thing they don’t usually compromise on is space.
What are your expectations for your domestic vehicle, the Stanlib Income Property Fund, over the next five years?
to a total annual return of about 8% to 10%, mainly income driven. There is a currency element to it, but you get diversification that will mitigate it to some degree. Some 40% of the income is sourced from outside SA.
What are your views on domestic office, retail and industrial property respectively?
Office property is perhaps facing the biggest challenges of the three at present, naturally a consequence of the struggling economy, considerable supply coming through, and tenant consolidation. For example, larger groups such as Discovery and Sasol will be consolidating from various buildings into single locations. Others have consolidated into more modern, flagship buildings.
Pressure, in turn, has been placed on rentals of lower-grade buildings, with many having to provide incentives to retain their tenants. I don’t see much overall rental growth for at least the next three years.
Retail property has done surprisingly well in recent years, but is also impacted by the considerable supply coming through. The most significant example is the Mall of Africa, which opened in Midrand recently with 131 000m2. It’s affecting most neighbouring shopping centres.
Finally, industrial property is doing reasonably well at present, driven to some extent by retail demand for warehouse space (distribution and logistics). However, rental growth will be limited in the foreseeable future. Vacancies are around 4%.
What are the prospects for the emergent residential listed property sector?
but it’s more focused on developing residential assets.
What is your view on the rand hedges in the sector?
Several of them have performed exceptionally well. Most impressive among them has been Nepi [New Europe Property Investments], which continues to generate considerable growth in Romania. This has been driven by a pipeline which at some point may slow down. The growth will then have to be generated organically from existing assets. Redefine is also interesting, especially with its recent Polish acquisition. Poland, incidentally, is the strongest economy in Eastern and Central Europe.
What are your preferred sectors and funds within your broad portfolio?
Offshore, including emerging markets.
The Stanlib Global Property Fund is perhaps top of my list at present.
It’s a fund focused on global developed markets, property companies and related securities and has performed well above its sector average in recent years. The total return during the past year has been well above 25% in rand.
How have you achieved that in the relatively depressed global investment environment?
Alpha is created by picking intraregional stocks as opposed to geographic tilts, as we would rather eliminate a largely unplayable variable in currency calls. We currently hold 87 stocks (compared with the S&P Benchmark with over 200 stocks). Biggest exposure is to the US at 58%, followed by UK and Europe at about 10% each.
The fund has a strong bias towards investors rather than developers; we prefer companies that generate above-average growth in their rentals streams. Our focus is on stocks that are underpinned by robust cash flows that are mostly reinvested into the fund on a regular basis.
Keillen Ndlovu Head of listed property funds at Stanlib