24 Oct 2012

SA's listed property a good buy now

Now is the time to buy listed property thanks to low interest rates, attractive bond yields and distribution growth from the listed property sector.

With interest rates at historically low levels and likely to stay there for some time and with inflation likely to accelerate from the current 5 percent level, there aren’t many asset classes that will deliver significant inflation-beating returns over the next 5 years.

This is according to Ian Anderson, chief investment officer at Grindrod Asset Management who says distribution growth from the listed property sector is expected to accelerate towards 8 percent in 2014.

The company has a wealth of experience and proven track-record in managing the portfolios of listed property securities.

“Any substantial pullback in the listed property market should be viewed as a buying opportunity by those investors currently underweight in this asset class,” he says.

Anderson explains that South Africa’s listed property sector rallied 2 percent last week as the Rand strengthened and bond yields fell.

The sector gained 3.3 percent between Monday and Thursday, but a number of the larger market capitalisation companies were sold off aggressively on Friday.

Capital Property Fund (+4.3 percent), Growthpoint Properties Limited (+3.5 percent) and Hyprop Investments Limited (+2.1 percent) led the market higher while Investec Property Fund (-6.5 percent) and Premium Properties Limited (-4.7 percent) declined over the week.

Read the article on Investec’s rights offer which opened on 15 October here.

Annuity Properties Limited announced the financial effects of its latest acquisitions and also announced a specific issue of units for cash as part of the funding of the property acquisitions.

Vividend Income Fund Limited reported distributions of 50.5c per unit for the year ended 31 August 2012 and reiterated management’s guidance for 2013 of 52.38c, placing the company on a clean forward yield of 9.7 percent.

This is significantly higher than the current sector average of around 7.1 percent suggesting that Vividend is attractively priced on a relative basis at the current price of 565c (which includes a 26c distribution), he points out.

Listed property, with a high initial income yield (in excess of inflation) and high expected income growth (in excess of inflation) is very likely to deliver returns of more than 5 percent above inflation over the next 5 years, says Ian Anderson, chief investmnet officer at Grindrod Asset Management.

Vunani Property Investment Fund announced that Vunani Limited had sold a total of 9.1 million Vunani Property Fund units by way of a private placement conducted by Investec Bank.

Vunani Limited is expected to dispose of its remaining units in due course to settle debt obligations, according to Anderson.

“With little sector-specific news expected until Fountainhead Property Trust reports final results at the end of October, South Africa’s listed property sector will in all likelihood take its cue from the bond market and the Rand.”

Speaking to Property24.com, Anderson says there aren’t sectors that look more lucrative than others given the fact that most of the listed property companies have well diversified portfolios across all property sectors.

He says the obvious exceptions are the retail-focused property funds, the likes of Hyprop and Resilient Property Income Fund.

“What has emerged, is a two-tier market where the largest and most liquid companies are trading on significantly lower yields (higher valuations) than the smaller, less liquid companies (and usually companies without long, established track records).”

Anderson says this could potentially provide an opportunity for investors who are prepared to accept a little more risk and for that, they would receive an income yield between 2 and 3 percent above the sector average, with income growth also likely to outstrip the sector average as the smaller companies are able to conclude more yield accretive transactions.

Asked what investors should look out for when buying in this economy, he says most listed property companies have long established track records with well diversified records.

Here are some tips for investors:

1. Investors should probably steer clear of companies with higher exposure to B or C grade office properties where vacancy rates, although already high, could still increase.

2. Given an anticipated acceleration in distribution growth rates (on the back of lower borrowing costs, declining vacancy rates, except in B and C grade properties and income-enhancing asset management) the B units of those companies that have adopted the A & B unit structure are likely to deliver superior returns as their investment thesis is built around future growth and not current income yield.

3. Consider which asset classes are likely to deliver inflation-beating returns in the medium-term (and long-term for that matter).

With interest rates at historically low levels and likely to stay there for some time and with inflation likely to accelerate from the current 5 percent level, there aren’t many asset classes that will deliver significant inflation-beating returns over the next 5 years.

In the longer term, the outlook for the sector remains positive given an expected acceleration in distribution growth rates on the back of lower borrowing costs, declining vacancy rates and income-enhancing acquisitions and redevelopment opportunities

“Listed property, with a high initial income yield (in excess of inflation) and high expected income growth (in excess of inflation) is very likely to deliver returns of more than 5 percent above inflation over the next 5 years.”

Recently, ratings agency Standard and Poor’s (S&P) downgraded South Africa’s long-term foreign currency credit rating to ‘BBB’ from ‘BBB+’ and the long-term local currency credit rating to ‘A-’ from ‘A’.

S&P maintained the negative credit outlook on the rating and gave the following reasons for the downgrade:

1. The recent strikes in the mining sector were likely to feature in political debates in the run up to the 2014 general elections hence increasing policy uncertainty

2. Underlying social tensions that may result in amplified spending pressures thus undermining the fiscal consolidation path

3. Weaker business and investment climates which may weigh on South Africa’s economic growth prospects.

In response to this downgrade, National Treasury notes that while there are risks to growth, the country’s fiscal framework continues to be guided by three principles that were reiterated in the 2012 Budget in February.

These are counter cyclicality, debt sustainability and intergenerational equity.

National Treasury said in a media statement, that on 10 October, Cabinet approved the fiscal framework for the next three years, details of which will be announced by the Minister of Finance on 25 October during the Medium Term Budget Policy Statement.

“We believe that our fiscal plan is realistic and achievable and there is no historical evidence to support S&P’s assertion that “…underlying social tensions [will] increase government spending pressure,” says National Treasury.

Anderson points out that this downgrade is more significant than the Moody’s downgrade as it moved the country’s lowest credit rating one notch lower.

The Rand weakened substantially after the downgrade announcement, he notes.

He adds that in the longer term, the outlook for the sector remains positive given an expected acceleration in distribution growth rates on the back of lower borrowing costs, declining vacancy rates and income-enhancing acquisitions and redevelopment opportunities. – Denise Mhlanga