Correlation between bonds and listed property weakening

Posted On Thursday, 11 July 2013 08:49 Published by eProp Commercial Property News
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THE historically close correlation between South African listed property sector yields and yields to maturity on long-term government bonds appeared to break down in June, according to Catalyst Fund Managers.

Catalyst Fund ManagersGiven the premium at which South African listed property is now trading compared with bond yields, this could lead to extended price volatility in the sector, which has seen its share of erratic share price movements over the past two months.

Analysts have said the global "search for yield" over the past few years has produced a close correlation between bonds and listed property, which are both yield-bearing investments.

Catalyst said this week that listed property yields firmed by 0.23% in June as the South African listed property index recorded a total return of 4.38%. However, the yield to maturity on the long-term government bond index weakened by 0.4% to end the month at 7.69%.

With the listed property sector’s yields having rerated relative to the government bond index by 0.63%, "the listed property historic rolled yield is now trading at a premium spread to the long-term government bond index yield of 1.25%", compared with the five-year average of 0.18%, Catalyst said.

It said it was unlikely that the outlook for distribution growth from the listed property sector had improved significantly in order to "justify this new premium spread".

This was because property fundamentals had not improved significantly over the past few months "and, looking forward, income distributions may be negatively impacted as historic funding structures roll over and reprice to higher funding base rates over time".

Catalyst said long-term government bond yields could firm by about 0.75%, or alternatively the listed property sector yield could derate relative to the bond index by about 0.75% — meaning listed property share prices would underperform.

"South African listed property pricing will not be immune to capital market volatility, but over the long term the total return from listed property will be driven by the income, plus growth in that income, over the investment horizon."

Last modified on Thursday, 17 April 2014 13:37

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