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Listed property streets ahead

Posted On Friday, 25 November 2011 02:00 Published by eProp Commercial Property News
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The JSE’s R146bn listed property sector has posted another solid performance over the past 12 months, making more money for investors than general equities, cash or bonds.

Property-Housing-ResidentialListed property set to outperform equities

High demand for secure income streams

“Listed property is one of the few sectors globally that continued to show positive cash earnings growth through the global financial crisis”


The JSE’s R146bn listed property sector has posted another solid performance over the past 12 months, making more money for investors than general equities, cash or bonds.

So there’s a good chance that property stocks will again trump other asset classes for calendar 2011. Last year property stocks notched up a total return of an impressive 30%, followed by general equities at 19%, bonds at 15% and cash at 7%.

Figures from Catalyst Fund Managers show that for the 12 months to the end of October property stocks delivered a more muted 9,6%, albeit still slightly ahead of general equities at 9,4%. Bonds and cash lagged at 7,71% and 5,88% respectively.

The picture looks a little different for the first 10 months of 2011. Bonds and listed property share the lead with a total return of around 8%, while cash and general equities have delivered less than 5% over the same period.

However, listed property’s 7,69% average return for the year to date masks a significant performance gap between individual counters. In fact, the difference between the best and worst performing property stocks from January to October this year is a staggering 131%. The Resilient group’s opportunistic hybrid play, Fortress Income Fund B, was the sector’s winning stock over the 10-month period with a total return of 85%. That’s in stark contrast to hotel fund Hospitality B, which ended at the bottom of the pile with a total negative return of -46%. Others among the sector’s top five best performers are Capital Property Fund (17%), Fortress A (17%), Acucap Properties (15%) and SA Corporate Real Estate Fund (14%).

Granted, listed property is not expected to repeat 2010’s stellar performance but the sector could still breach the 10% total return mark this year, as jittery investors continue to gravitate towards income-generating assets.

Property analysts say listed property returns have been supported by increased money-flow from investors who previously preferred general equities or fixed income vehicles like cash or bonds.

“The key attraction of listed property is its relatively high and, more importantly, growing income yield,’’ says Catalyst investment manager Paul Duncan He notes listed property is currently trading at a forward income yield of around 8,3%, which compares favourably with the 8% yield-to-maturity on the 10-year government bond. In addition, property stocks have the ability to grow their income over time whereas bonds do not.

Investors are also catching on to the fact that listed property offers a more stable and predictable earnings growth outlook than general equities. Nesi Chetty, head of property for Momentum Asset Management, says property companies were still able to achieve decent distribution growth of 4%-7% on average for the most recent reporting period. In contrast, a number of general equity sectors disappointed on the earnings growth front.

Chetty ascribes the sector’s resilience largely to the fact that vacancies in retail and industrial property portfolios have held up well in 2011. The office sector has admittedly deteriorated, but the listed property sector tends to have an overweight exposure to retail.

Larger pension funds and institutional investors are no doubt also feeling more comfortable with the sector in terms of size and liquidity – around R20bn was added to the sector’s market cap over the past year alone on the back of five new listings (Vividend, Investec, Rebosis, Vunani and Dipula) and some sizeable mergers and acquisitions.

The latter include Hyprop Investments’ Attfund acquisition and Capital Property Fund’s tie-up with stablemate Pangbourne Properties.

The key question is whether listed property will remain a good place for investors to be over the next 12 months. Macquarie First South property analyst Leon Allison believes so. He recently upgraded his stance on listed property from neutral to overweight. “Property is one of the few sectors globally that continued to show positive cash earnings growth through the global financial crisis.’’

Allison says though there’s no doubt that the sector faces several challenges, including double-digit operating cost escalations and negative rental reversions on some lease expiries, property should continue to outperform general equities.

That’s based on Allison’s forecast 9% total return for listed property over the next 12 months versus only 5% for general equities (Macquarie’s house view).

The trick, of course, is to identify which individual stocks among the 24 in the sector have the potential to deliver above-market returns. Allison believes the A units of hotel fund Hospitality Property Fund and industrial-focused Capital Property Fund are the best buys, with forecast total returns of 18% and 14% respectively over the next 12 months.

Chetty’s top picks also include Capital, which he believes is one of the best-run funds in the sector. He also favours sector heavyweight Growthpoint Properties and new kid on the JSE real estate block Vunani Property Fund

Chetty expects the newly acquired V&A Waterfront to be a key growth driver for Growthpoint. “In addition, we like the fact management is tidying up Growthpoint’s portfolio and disposing of noncore properties at a premium to NAV.’’

Given office-focused Vunani’s size and low gearing, Chetty says there’s ample opportunity for management to do yield-accretive acquisitions over the next 12 months.

Duncan also singles Vunani out as a value proposition. “At a forward yield of 10,5%, the counter looks cheap relative to the sector’s average 8,3%.’’

Despite poor liquidity, Duncan believes Vunani has the best-quality portfolio of all the newer listings. A strong, proactive management team is a further plus.

Among the midcap counters, Duncan places his bets on the A units of Fortress Income Fund The stock offers investors with a low appetite for risk an attractive entry yield of around 9% plus secure growth of 5%/annum.

Duncan rates Fountainhead Property Trust as the best-priced stock among the bigger, more established players. “Granted, the stock will underperform in the short term, but income growth should recover strongly after 2012 once the Blue Route Mall in Cape Town has reopened.’’

Last modified on Tuesday, 22 April 2014 10:26

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