Listed property outlook: still delivering the goods


For the SA listed property sector, 2011 was the year of deteriorating fundamentals as global markets were hit by a series of shocks and events that kept uncertainty high.
Company earnings were generally on the downside and guidance was often downgraded to take heed of weak consumer and business confidence.
Despite this, the SA listed property index (Sapy) outperformed all other major assets classes, delivering a total return of 8,8% for 2011. That compared to a total return of only 2,6% for general equities. Cash and bonds returned 5,7% and 8,7% respectively.
Sycom Property Fund (24%) was the sector’s best performing stock in 2011 followed by newcomer Investec Property Fund (23%) and SA Corporate Real Estate Fund (19%). For the third consecutive year, Hospitality Property Fund (B) was the worst performing counter in the sector.
The outperformance witnessed last year continued in 2012. For the first quarter of 2012, the property sector delivered a total return of 8% compared with 6% for equities, 2,4% for bonds and 1,4% for cash.
The property sector’s outperformance has been accompanied by dramatic growth in terms of new listings, mergers and acquisitions. As a result, the sector’s market cap has surged from R130bn in January 2011 to R163bn at the end of May 2012. Though capital growth of the underlying funds accounted for the overall increase of the sector, the pace of new listings accelerated in the past 18 months.
Besides Vividend Income Fund, which listed at the end of 2010, other new property counters have listed since January 2011. These are Investec Property Fund (R1,7bn market cap); Rebosis Property Fund (R2,2bn); Dipula Income Fund (R1,4bn); Vunani Property Investment Fund (R0,6bn); Synergy Income Fund (R1,1bn); Arrowhead Properties (R0,8bn through the unbundling from Redefine); and most recently Annuity Properties (R0,5bn).
Also, acquisitive activity was rife with capital raisings conducted by, among others, Hyprop Investments (R1,7bn), Growthpoint Properties (R1,8bn), Vukile Property Fund (R0,9bn) and Fountainhead Property Trust (R1bn).
Arrowhead has been the sector’s best performing stock for the first quarter of 2011. Its A and B units delivered a total return of 15,3% and 34,2% respectively. Resilient Property Income Fund (14,6%), Vunani (11,5%) and Growthpoint (11,4%) also count among the top performers for the first quarter of 2012.
The outlook for listed property is determined by the macro-economy, albeit with a lag. Continued economic improvement is necessary to create an inflection and drive occupier demand. This is, however, dependent on the progress of the global economy.
In Europe, the crisis has deepened to a point where the eurozone has slipped back into recession and will drag global economic growth down.
The fiscal austerity measures being installed are necessary to regain market confidence and restore competitiveness. But they are likely to have a negative effect on growth, increasing the fragility of SA’s recovery – given the strong economic links.
On a sector level, demand for high-quality retail remains strong, with average vacancies in regional shopping centres below 4%.
Less dominant community and neighbourhood centres, however, continue to struggle as retailers seek proven defensive locations for expansion.
Retail sales growth is expected to remain robust, more so in the lower-income areas, where above-inflation wage and social grant increases benefit disposable income.
Retailers remain committed to expanding space over the next year, with most national retailers expecting to grow space by 5,5%.
The office sector has struggled the most in recent months, with vacancies above 10% nationally. The fundamental driver of demand is white-collar employment growth, particularly in the financial services sector. When confidence is restored, demand is expected to emanate in the grade A office market, with B and C grade space likely to continue showing negative absorption.
The industrial sector appears well-positioned, as market fundamentals remain propped by the big-box logistics and distribution sector of the market. Vacancies in the overall industrial market are currently under 5%.
The silver lining for the property sector is the potential shortage of new space. Banks’ reluctance to finance speculative developments has had a marked effect on the development pipeline.
Optimism in the building industry remains low, with new building plans passed at levels last seen in 2005. However, the positive effect that a possible shortage of space will have on rental growth is likely to be at least 24 months away.
Investors in listed property are attracted mainly to its fixed income nature. Consequently, the sector’s valuation is often measured against alternative asset classes such as government bonds.
Investors would ordinarily seek a risk premium for exposure to property, given the underlying exposure of rental income to credit risk and market risk. But the allure of property lies in its ability to grow earnings, whereas bonds generally pay a fixed coupon.
Property may currently appear expensive at a forward yield of 7,8% (May 31) versus the 10-year bond yield of 7,9%. But the asset class offers investors recurring income (backed on a company level by a diverse range of properties, tenants and geographical exposure) with strong growth opportunities, both in terms of income and capital.
Investors in listed property can expect income growth of an average 5% over the next 12 months. But growth is likely to rebound to 7% the following year.
For a long-term investor who is willing to ignore the possible short-term fluctuations in capital values, listed property remains one of the best asset classes available.