South Africa

Listed property: a ray of hope for investors

Property analysts say reasonable returns can be expected this year. Denise Mhlanga / 6 April 2009 17:43

http://www.moneyweb.co.za/archive/listed-property-a-ray-of-hope-for-investors/

Real estate analysts say the listed property sector is still performing reasonably well, albeit in a difficult economic environment.

One market analyst said that underlying asset quality is becoming more relevant. While investors are not going to get 50% upside from the sector, they are likely to still get a reasonable, positive return.

Zayd Sulaiman, an analyst from Catalyst Fund Managers said the listed property companies have generated average distribution growth in excess of 10% over the last 12 months.

Even though fundamentals are weakening, the average distribution growth is still expected to be robust and exceed inflation. Debt levels of the South African listed property sector are relatively low, he said.

Sulaiman said vacancies are low (even thought they are forecast to increase) and contractually unexpired leases are escalating at levels above inflationary expectations.

On average, leases expiring in the next year or so are still generally below current market rentals. Each sector (retail, office and industrial) faces its own challenges, he said.

Vuyani Bekwa from Investec Property said there is an expectation that vacancies could rise and this will affect returns in the coming year. The 2008 IPD total return of 13% was the lowest in 5 years, coming from a high of 27.7% in 2007, he noted.

Niel Harmse, research analyst at IPD SA, said the South African listed property sector is still underpinned by very healthy direct property fundamentals.

However, how it performs will be determined largely by the impact of macroeconomic factors such as inflation, consumer and manufacturing demand and interest rates, he said.

Income return remains stable as a result of predictable income streams through pre-negotiated rental contracts. Vacancy rates and net income growth are expected to come under pressure during 2009.

Vacancy rates rose during 2008 and this was off a low base, still leaving vacancy rates below 10-year averages in most segments, said Harmse.

Harmse said the South African property market is very diverse in terms of being exposed to a wide variety of tenants, so property returns are not at the mercy of one or two sectors of the economy.

He said smaller commercial property markets like Ireland or New Zealand tend to be driven by specific sectors of the economy. Commercial property returns in Ireland, for example, are very dependent on the financial services sector which had a significant fall-out during 2008.

Asked about expected yields this year, he said these are already better than those on bonds.

Listed property seems to be better-priced than other asset classes such as general equities, bonds and gold. Another 2% cut in the repo rate before the end of 2009 would be good for real estate, was his message.

Property Loan Stocks (PLS) performed relatively well for the year to December 2008, given the current global crisis, said Stan Garrun, managing director of IPD SA.

He said PLS share prices on average outperformed other major sectors of the exchange by at least 10%. For 2008, the share price of PLSs lost an average of 27% while resources and financials lost an average of 46% and 37% respectively.

Garrun said vacancy rates, rental levels and net income growth are influenced by external macroeconomic factors such as interest rate movements, retail sales and manufacturing production, but income security from leases means less risk for property investors.

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