Listed prop­erty is strong, de­spite re­cent 19% fall, say ex­perts

Weekend Argus (Saturday Edition) - - PERSONALFINANCE -

Af­ter a very good run, the lo­cal listed prop­erty mar­ket fal­tered in the sec­ond quar­ter of this year, re­turn­ing mi­nus 0.35 per­cent, ac­cord­ing to Pro­fileData. But fund man­agers say the mar­ket’s volatil­ity of the past two months has not up­set the fun­da­men­tals, which will see the sec­tor con­tin­u­ing to de­liver strong re­turns.

Neil Stu­art-Findlay, port­fo­lio man­ager of the In­vestec Prop­erty Eq­uity Fund, says the volatil­ity was caused by a change in the mone­tary pol­icy of the United States cen­tral bank rather than changes in the fun­da­men­tals of the listed prop­erty mar­ket.

The FTSE/JSE SA Listed Prop­erty In­dex has re­turned 26.01 per­cent a year for the past five years.

For the cal­en­dar year 2012, the in­dex re­turned 35 per­cent, and Stu­ar­tFind­lay says the re­turns at the start of this year were good, too.

How­ever, be­tween May 17 and June 24, the listed prop­erty in­dex fell by 19 per­cent, ac­cord­ing to Esti­enne de Klerk, chair­man of the South African Real Es­tate In­vest­ment Trust As­so­ci­a­tion’s reg­u­la­tion and tax­a­tion com­mit­tee and the ex­ec­u­tive di­rec­tor of Growth­point Properties.

Prices re­cov­ered there­after, and Stu­art-Findlay says the in­dex is show­ing a gain of 8.8 per­cent for the first half of the year, which is well ahead of the re­turns for do­mes­tic eq­ui­ties (2.3 per­cent) and cash (2.6 per­cent).

Stu­art- Findlay says that when the US Fed­eral Re­serve in­di­cated it might grad­u­ally start to re­duce the level of mone­tary stim­u­lus in that coun­try, fears of less liq­uid­ity and ris­ing short-term US in­ter­est rates re­sulted in US bond yields ris­ing. This put pres­sure on bonds across emerg­ing mar­kets and in South Africa, which, in turn, neg­a­tively af­fected the prices of South African listed prop­erty shares, he says. The val­u­a­tions (prices rel­a­tive to earn­ings) of shares in this sec­tor are di­rectly driven by the level of bond yields.

De Klerk says that, apart from the mone­tary pol­icy de­ci­sions in the US, lo­cal listed prop­erty was af­fected by unin­spir­ing lo­cal eco­nomic in­di­ca­tors and con­cerns about the Chi­nese econ­omy.

But both Stu­art-Findlay and De Klerk say that, de­spite the fluc­tu­a­tions in listed prop­erty share prices over the past two months, the sec­tor con­tin­ues to of­fer in­vestors a pre­dictable and grow­ing in­come stream, and growth is ex­pected to ac­cel­er­ate this year.

The in­come from listed prop­erty is fairly sta­ble, but share prices can be volatile, Keillen Ndlovu, head of listed prop­erty at Stan­lib, says.

Stu­art-Findlay says listed prop­erty is driven by sta­ble es­ca­la­tions in rentals, and th­ese es­ca­la­tions con­tinue to run at about eight per­cent a year. This is well ahead of in­fla­tion, he says, and as a re­sult In­vestec is ex­pect­ing a growth in in­come from listed prop­erty of 7.5 per­cent this year and 7.8 per­cent next year. Stu­art- Findlay says the abil­ity of the listed prop­erty sec­tor to grow in­come over time is one of the pri­mary rea­sons it gen­er­ates higher real re­turns for you and why it is dif­fer­ent from as­set classes such as cash and bonds, where in­come is pri­mar­ily fixed. He says that in the first half of this year the sec­tor gen­er­ated a re­turn of 3.1 per­cent from in­come earned, while re­turns from growth in in­come ac­counted for a fur­ther four per­cent.

Ac­cord­ing to Stu­art-Findlay, the strong gains listed prop­erty shares made last year were a re­sult of a rerat­ing of the prices of the shares on the back of lower bond yields. The strong re­turns have abated, and you are un­likely to see such good re­turns again this year, he says.

The re­cent cor­rec­tion has nor­malised prices, and In­vestec’s view is that cur­rent val­u­a­tions are con­ducive to gen­er­at­ing an­nual re­turns of be­tween 10 and 12 per­cent in fu­ture, Stu­art-Findlay says.

The re­cent volatil­ity in the prices of listed prop­erty shares high­lights their sen­si­tiv­ity to changes in the yields of do­mes­tic bonds, and fur­ther pres­sure on bonds poses the big­gest risk of short-term move­ments in the listed prop­erty sec­tor, he says.

As a re­sult, it is im­por­tant to choose shares with a good earn­ings his­tory, an ex­pe­ri­enced man­age­ment team and a good val­u­a­tion, Stu­ar­tFind­lay says.

Ndlovu says the listed prop­erty sec­tor has ex­pe­ri­enced sim­i­lar lev­els of price volatil­ity be­fore, with a 26-per­cent de­crease be­tween May and July 2006, and a 37-per­cent de­crease be­tween Novem­ber 2007 and June 2008.

How­ever, he says, prices re­turned to their pre­vi­ous lev­els over time, be­cause the fun­da­men­tals were in place and in­come was grow­ing.

Ndlovu says in­vestors should have a three- to five-year time hori­zon when in­vest­ing in listed prop­erty.

Fund man­agers with listed prop­erty port­fo­lios ex­pect their sec­tor to con­tinue to per­form well, while those deal­ing in eq­ui­ties and bonds are more pes­simistic about the mar­kets, writes Laura du Preez.

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