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Listed property at new high as institutions catch up

Posted On Tuesday, 19 October 2010 02:00 Published by eProp Commercial Property News
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The South African listed property index reached a record high of 385,70, thanks to an increase in demand from both institutional and retail investors.


Keillen NdlovuStanlib property analyst Keillen Ndlovu said yesterday institutional investors had largely underallocated — invested minimally — in listed property, but were now trying to catch up.

This was increasing investor inflows into listed property to drive the index past the previous high of 385,66.

Mr Ndlovu said listed property continued to provide steady and inflation-beating income growth.

“Unlike equities, listed property never had major earnings downgrades,” he said.

He says equities still have to move up by about 12% to get to their record high of 33,309,82.

The South African listed property index is also benefiting from low inflation, interest rate cuts and the strong bond market.

“Listed property has been 82% correlated to the bond market over the last year. It tracks the bond market due to its reliable income generating ability,” he said.

The recent results season saw overall vacancies generally decline across the board.

Mr Ndlovu said the sector was trading at a forward yield of 8,15% assuming an income growth forecast of about 7%. The 10-year bond was trading at a 7,85%.

“This means that listed property is trading at a discount of 30 basis points to the bond market. Cash is only offering 6,17%,” he said.

At the previous record high in 2007, listed property was trading at a forward yield of about 7%, whereas bonds were trading at 8%. This means listed property was trading at a premium of 100 basis points to the bond market.

“So relatively speaking, this means that the current valuations are not as demanding as before.”

But, Mr Ndlovu said, the biggest downside risk to the local property market was the direction of the bond market.

“We are also concerned with the electricity hikes — they increase the cost base for tenants, which might make rental bargaining difficult for landlords. And the office market is still feeling the pain of oversupply,” he said.

Mr Ndlovu warned while property had provided superb returns, “it should be stressed that the primary aim for investing in listed property is for income. Capital growth comes out over time as a bonus.”

He argued that listed property as a separate asset class deserved a place in a balanced portfolio.

“Other factors being constant, assuming a stable bond market and no change in listed property’s rating relative to the bond market, we are looking at total returns of about 14%. If bond yields weaken by 50 basis points we are looking at about 8% total returns in the next year (that is basically income only. No capital growth),” Mr Ndlovu said.

Last modified on Monday, 21 April 2014 09:45

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