Value in lo­cal list­ings

In­vestors may have a lim­ited win­dow of op­por­tu­nity to buy Sa-fo­cused prop­erty stocks at record div­i­dend yields

Financial Mail - - MONEY&INVESTING - Joan Muller mullerj@fm.co.za

Though there has been some­thing of a re­cov­ery in prop­erty share prices in re­cent weeks af­ter three months of neg­a­tive re­turns, the sec­tor is by and large still look­ing rather cheap.

This is par­tic­u­larly true for prop­erty stocks that gen­er­ate all or most of their earn­ings in SA, with at least a dozen lo­cal coun­ters now trad­ing at div­i­dend yields north of 10%.

That’s at­trac­tive com­pared with the av­er­age 6%-7% that in­come-de­pen­dent in­vestors are get­ting on cash in the bank, or the just more than 8% on of­fer from govern­ment bonds.

In fact, the yield spread be­tween govern­ment bonds and Sa-fo­cused prop­erty stocks is the high­est it has been in 20 years, says Bridge

Fund Man­agers chief in­vest­ment of­fi­cer Ian An­der­son. De­spite the 15%-18% re­cov­ery recorded in the year to date by the likes of Ac­cel­er­ate Prop­erty Fund, Oc­todec In­vest­ments, Emira Prop­erty and Ind­lu­place Prop­er­ties, An­der­son says most lo­cal prop­erty coun­ters still of­fer sig­nif­i­cant value rel­a­tive to bonds and eq­ui­ties. Many are trad­ing at size­able dis­counts to NAV.

“[Prop­erty] is prob­a­bly the only Sa-fo­cused sec­tor on the JSE that has not re­sponded pos­i­tively to the im­proved po­lit­i­cal and eco­nomic back­drop and re­cent in­ter­est rate cut,” he says.

This is prob­a­bly be­cause in­vestors have fo­cused on what has been happening to head­line in­dices such as the SA listed prop­erty in­dex, which has been dragged down by the sharp sell-off in Re­silient sta­ble shares, as well as some off­shore coun­ters, says An­der­son.

The in­dex is down more than 14% in the year to date.

An­der­son refers to the price de­clines in the Re­silient sta­ble and the en­su­ing un­cer­tainty around the group’s dis­tri­bu­tion (or div­i­dend) growth num­bers. “That has spooked in­vestors who would oth­er­wise have in­creased al­lo­ca­tions to listed prop­erty — specif­i­cally Safo­cused stocks,” he says.

He notes that the stronger rand and head­winds faced by off­shore prop­erty mar­kets are also mak­ing would-be in­vestors ner­vous, given the dom­i­nance of rand-hedge coun­ters in the JSE real es­tate sec­tor.

“These fac­tors have cre­ated a unique buy­ing op­por­tu­nity for in­vestors,” says An­der­son.

Kelly Hook, in­vest­ment an­a­lyst at Me­tope In­vest­ment Man­agers, agrees that lo­cal prop­erty stocks are poised to ben­e­fit from the wave of pos­i­tive sen­ti­ment that has swept across SA since the ANC’S De­cem­ber con­fer­ence and the sub­se­quent elec­tion of Cyril Ramaphosa as SA pres­i­dent.

Equally en­cour­ag­ing, says Hook, is that many prop­erty funds have re­based their dividends to more sus­tain­able lev­els.

She refers to a wor­ry­ing trend last year of com­pa­nies boost­ing their div­i­dend growth num­bers through lower qual­ity, one-off in­come sources such as trad­ing and cap­i­tal prof­its, un­der­writ­ing or de­vel­op­ment fees, and for­eign ex­change gains.

“Poorer qual­ity in­come, even if sus­tain­able, di­lutes the in­vest­ment case and takes away from pure prop­erty in­come,” says Hook.

Sev­eral funds have now “washed out” these

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