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

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.