Equity a better bet than property shares.

Posted On Monday, 02 December 2002 10:01 Published by eProp Commercial Property News
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Conventional wisdom suggests that with the rand improving strongly against the world’s major currencies, and with inflation and interest rates expected to head back down from their current highs, one of the best places to look for good investments would be on the listed property market. But the experts warn otherwise, saying that while property shares are expected to rerate next year, other equity investments will do better.


James TempletonAlthough the PLS and PUT sectors each underperformed the Financial & Industrial Index by more than 20% in the period between September 2001 and April this year – when the rand was at its worst – investors should not expect similar outperformance as a result of the rand’s recent improvement.

Property analyst, James Templeton at Barnard Jacobs Mellet says that although the Property Unit Trust (PUT) and Property Loan Stock (PLS) sectors have already begun to show signs of recovery in November, investors must remember that property yields are closely related to bond yields. And unlike the scenario in 1998, when escalating interest rates were closely followed by bond yields, this year bond yields have remained fairly firm.

As a result, the differential between the listed property yields, and the bond yields has widened to 3.4%, compared to a historic average of between 1.5% and 2%, says Templeton. This – along with the fact that the growth of the sector in the last year has been lower than the historic average, and is now expected to begin to head back to normal growth - indicates that a rerating in the property sector can be expected. However, using a forward dividend yield of 14% and assuming a rerating of 6%, Templeton is forecasting a total return for the property sector of around 20% over the next 12 months, compared with a much more impressive total return of 32% predicted by BJM for the All Share Index .

Technically, this means that listed property shares are expected to underperform the overall market next year, says Templeton, and investors should not be too eager to switch out of the broader market in the hopes of excess returns from property shares.

While an investment in the broader market would therefore be preferred to one on listed property shares, Templeton would choose listed property shares as an investment before considering buying directly into physical property. While listed and direct property investments offer similar returns, listed shares provide investors with much greater liquidity, diversification and therefore risk benefits, and an ability to invest at a much lower cost, says Templeton.

Over the last three years in particular, liquidity has improved significantly in the sector, with several new listings and corporate deals valued at over R7.5bn taking place in 2001. There are, however, corporate governance concerns in the sector, stemming from a potential conflict of interest between shareholders in listed companies, and shareholders in the property management companies, who may not necessarily want the same things. In addition, volatility in listed property is much higher than in the direct market.

It is, however much easier to benchmark the performance of listed companies than direct property, says Templeton, and data until 2001 has shown that the PLS and PUT sectors outperformed direct property for the previous seven years, showing a total return of 12.4%.

For those investors willing to take a bet on the property sector, Templeton’s favourite stocks are Martprop and Pangbourne, while he would recommend avoiding Capital and Apex Hi B units.

International property group, Liberty International remains a firm favourite among South Africans , says Templeton, for its excellent portfolio and rand hedge qualities. The share has been fairly volatile in the UK recently, with its price moving between GBP5.60 and GBP6, but it trades at a much lower discount than its UK peers, says Templeton. This is partly because of the quality of its portfolio, but Templeton also believes that although the share price is largely determined in London, strong demand from the group’s roughly 45% SA shareholder base could be underpinning it. At its current levels, Templeton says he is neutral on the stock.

Fund manager, Stephen Mildenhall of Allan Gray concurs with Templeton’s views that the equity market will outperform property over the next year. Although the Allan Gray Stable Fund has increased its exposure to listed property shares in the last two months, Mildenhall remains more positive on other shares.

The low risk nature of the Stable Fund means that it has a relatively low exposure to the equity market. Therefore, the fund has added to its property shares because Mildenhall believes that compared to investing in bonds or holding cash, property shares are a more attractive investment. The initial yield on property stocks remains very high, he adds, at around 12% to 13%, and with inflation expected to fall next year the sector should continue to perform well. As a result the fund has increased it holding in property shares to above 2.5% of the portfolio, which Mildenhall says is probably slightly overweight relative to other fund managers and the sector’s weighting on the JSE.

According to Mildenhall, the Stable Fund is exposed to property through investments in Sycom and Grayprop, which he says offer the best return relative to the risk of the shares in the sector. He adds that direct property investments are not included in the funds as they are too specific, not tradable enough and very difficult to value in a portfolio.

Overall, Mildenhall says Allan Gray’s preferred sector remains Industrials. “The shares have outperformed over the last few months,” he says, ”but they are still trading at levels well below what they are worth, and are very attractive in relative terms.”

Last modified on Saturday, 26 April 2014 10:29

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