The South African listed property sector was facing an even tougher year than last year because it would not expand as fast as the general economy’s growth, an expert said yesterday.

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The sector is, however, expected to grow 6% this year, raising a distribution yield of 9,5%. Last year it grew 8%.

In its property outlook for this year, securities research group Macquarie First South yesterday upgraded the property sector to overweight.

Macquarie analyst Leon Allison said the upgrade of the sector was not due to its forecasting exciting returns in the next 12 months.

“It is more a case of a muted outlook for other asset class returns in what could be an uncertain, volatile environment. Listed property provides some downside protection with its high cash yield,” Allison said.

The upgrade to overweight was not based on a value argument, but rather a defensive one: a near-certain 9,5% cash yield and low beta in a potentially volatile environment and muted returns from other asset classes.

“We forecast 11% total return from listed property, virtually all of this is relatively certain distribution yield.

Thus we expect similar nominal returns, but higher risk-adjusted returns from property,” Allison said.

But he expected a continued gradual rise in vacancies, bad debts and arrears this year, eroding average sector growth from 8% last year to 6% this year.

However, the levels of vacancies, bad debts and arrears were generally manageable.

The office sector seemed the weakest, particularly in certain nodes where vacancies had reached or even breached 10%.

“We expect overall vacancies to have ended at around 6% last year and we forecast these to rise and peak at just over 7% by year end,” he said.

A further risk to the sector, and the economy, was the sharp rise in electricity and municipal rates.

Although these costs were mostly passed on to tenants, their cost of occupation rises, constraining their ability and willingness to pay higher rents.

Allison said that based on the historical relationship between listed property growth and the yield spread, it seemed that the property prices imply dividend per share growth of about 10 in the near term.

Source: Business Day