Listed property price correction offers opportunity

Posted On Tuesday, 04 June 2013 11:42 Published by Commercial Property News
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Listed property prices have seen a rapid correction over the past two weeks, although analysts say this provides opportunities for both investors and companies themselves.

Angelique de RauvilleAfter a strong run in the first five months this year, listed property prices have seen a rapid correction over the past two weeks, although analysts say this provides opportunities for both investors and companies themselves.
The South African listed-property index (FTSE-JSE Sapy index) declined by 16% from its peak two weeks ago on May 20 to the JSE’s close yesterday, while the share price of sector heavyweight Growthpoint Properties shed 20% during the period.
Growthpoint opened a massive R2.5bn equity raise a day after the Sapy index reached its peak and closed the oversubscribed unit placement early the next day.
Property investment group Handful of Keys CEO Angelique de Rauville says the correction in the listed-property market “is not altogether surprising because the sector had run exceptionally hard in the year to date”. However, while the correction itself was not a surprise, “the depth of it and the speed at which it has corrected has caught a few by surprise”, Ms de Rauville says.
Growthpoint’s share price fall has also been the consequence of having a significant international investor base. “Growthpoint and Redefine Properties both have over 10% international shareholders, which sounds great in theory, but it does create havoc in your share price in times of volatility.”
A “worst-case scenario” would be a further 10% correction in listed property prices, given some market expectation of bond yields weakening further by another 10%.
While the Reserve Bank’s decision to leave interest rates unchanged had little effect on the sector, the weakening bond market “has had a direct impact”. Given the declining prices in the market, Ms de Rauville says some property stocks “are starting to offer value at these levels”. 
The most significant opportunities are within some of the sector’s illiquid stocks, including Hyprop Investments, Resilient Property Income Fund and Fortress Income Fund, she says. “There’s some liquidity in the usually illiquid stocks”, providing opportunities to acquire units in companies, “which are usually very hard to come by”.
The prices of smaller companies have not corrected as significantly as larger ones, meaning larger stocks such as Growthpoint and Redefine “are offering better value than some of the small caps”.  “That said, some of the small caps are good quality stocks”, and are now more liquid than before. “For a new investor into the sector, it would probably be prudent to start buying, because I don’t think it’s too far from its bottom.”
Ms de Rauville says some property companies may soon consider buying back their own stock “and making a short-term profit” on their recent equity raises.
Stanlib head of listed property funds, Keillen Ndlovu, says the weakness in the listed-property market “was first driven by Growthpoint’s R2.5bn equity raise”. “At the time, we thought the listed-property market would normalise about a day or two later.”  However, “things got worse” after interest rates were not cut, gross domestic product figures “came out worse than expected”, SA’s trade deficit exceeded market consensus, foreigners sold off South African bonds, the rand weakened and bond yields rose.
As a result of the recent price fall, the one-year forward yield for the listed property sector has risen, from 6.1% early last month to just more than 7.2%, Mr Ndlovu says. “We believe that the current levels are presenting selective buying opportunities.”
A week prior to the start of the decline, analysts had warned at the South African Property Owners Association convention that a correction was likely. Anton de Goede, fund manager at Coronation Fund Managers, said at the convention the biggest risk to the industry were the prospects for bond yields. Much of the returns in the local sector have been driven by listed property’s correlation to the bond market, Mr de Goede says.
Furthermore, and given the number of new property listings in the past 18 months, Mr de Goede said at the time the sector could be at the “top end of the cycle” and possibly in a similar position to the small-cap, information technology boom of the late 1990s.

Source: BD

Last modified on Tuesday, 04 June 2013 11:57

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