Listed property’s outlook muted

Posted On Wednesday, 22 December 2010 02:00 Published by eProp Commercial Property News
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Although the listed property sector has performed exceptionally well this year, beating the JSE all share index on returns, expectations for next year are slightly muted given the lag between a turnaround in the economy and the sector.


Keillen NdlovuThe listed property sector’s total return of 29,1% for the year to date has far outstripped that of the all share index’s 17,3%, emphasising the defensive characteristics of this asset class.

Stanlib’s head of property funds, Keillen Ndlovu, says the strong performance has largely been driven by the strong bond market, increased appetite among retail and institutional investors, lower inflation, interest rate cuts and improved property fundamentals, particularly in the retail sector.

Mr Ndlovu says the retail sector makes up about 50% of the listed property market. He says property is highly correlated to the bond market. "For example, over the past year the correlation has been 83%."

Mr Ndlovu expects income to grow by about 6% to result in a forward yield of 8,25%.

"Assuming stable bond yields, we are looking at total returns of 13%. But if bond yields increase by 50 basis points, we are looking at total return of only 6,5%."

Meago portfolio manager Jay Padayatchi says the distribution growth from the property sector has, on average, been resilient.

Mr Padayatchi says that while gross domestic product is expected to grow faster next year than this year, it appears there will still be a slight drag on the performance of commercial property, which is still grappling with its re-emergence from the recession.

"These problems do, however, appear to be affecting the different sectors."

The office sector has been severely affected by the recession, with current vacancies averaging close to 10% and evidence suggesting this is likely to continue in the near term, although this is node-specific.

The industrial sector was less affected by the economic environment, although this was also specific to subsectors, with the warehousing sector continuing to perform well, but the manufacturing sector struggling with the strength of the rand, which saw an uptick in vacancies due to business failures.

Mr Padayatchi says indications are that this trend in the industrial sector will continue next year. He says retail appears to be the best performer of the three sectors, with vacancies in the low single digits on average.

Investec Asset Management portfolio manager Vuyani Bekwa says the listed property sector has had a stellar year.

Mr Bekwa says depending on what happens with the rest of this month, the sector could deliver about 30% for this year.

"This would spell another great year for the sector where it has been the best-performing asset class, highlighting its value and status in portfolios relative to equities, especially on a risk- adjusted basis."

He says although returns have exceeded expectations, fundamentals have met forecasts and proven again that property lags the economic cycle by at least 12-18 months.

"We have noticed a rise in vacancies, earnings downgrades in some instances, and more sober comments about the immediate future from management teams.

They have stated that the top line is being hurt by higher operating costs, which are now rising at about 13%-14% while gross rents are in the upper single digits," Mr Bekwa says.

He says fundamentals in the sector are likely to start improving in the second half of next year, with indicators such as vacancies, arrears and bad debts improving gradually over the next 12 months.

The most notable challenge for the sector this year, apart from increasing vacancies and bad debts, has been the significant uplift in costs emanating from dramatic electricity increases and rates bills.

Last modified on Monday, 21 April 2014 09:03

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