Is the bull run near its end?

Posted On Wednesday, 26 November 2003 02:00 Published by eProp Commercial Property News
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Experts ask whether a bubble is developing

Mariette WarnerWITH the listed property sector having had a very strong run in the past year, some are asking whether the sector has become overpriced and a property bubble is developing.

However, Mariette Warner, head of fund management at Standard Bank Properties, says the sector is not overpriced and there is no indication of a price bubble developing.

In her latest listed property update, Warner who is also manager of the Standard Bank Property Income Fund says that for the past 13 months, listed property has shown exceptionally good growth on the back of falling interest rates. She says there has been some talk of a property "bubble" developing.

"That is true in certain sectors of the residential market where prices have become overheated in a falling rental market," she says.

She says bubbles arise when prices spiral ahead of the underlying economic factors that determine intrinsic value and value relative to alternative investments. Listed property is an incomegenerating investment that is priced relative to other income-generating investments such as bonds and cash.

She says listed property offers the best income yield at present. "The question, then, is, are bonds overpriced and therefore also listed property?"

Warner says that given the falling inflation environment, real yields are high, therefore neither bonds nor listed property are overpriced. In addition, she says, further cuts in interest rates are expected because of the continued strength of the rand.

"None of these factors point to a high risk for listed property pricing currently," Warner says.

However, Simon Pearse, MD of the Income Specialists, a division of Marriott, offers a different perspective.

"We are saying that in terms of a fiveyear expectation, we feel that South African listed property is now overvalued," Pearse says.

He says the reasons for that include current income yields being below historical averages and the income yields in the better quality funds being only marginally higher than long bond yields.

Also, bonds are generally considered expensive at the moment, says Pearse.

"A third point is that South African listed property is more expensive than the equivalent open market property, and the fourth point we must consider is the lack of rental growth would indicate that current prices reflect an overpriced asset class."

Pearse says that in the short term interest rates might decline further and the prices of property could continue moving up, but they are looking at it over the long term as any investor should.

"For an income-dependent investor they can currently secure an income yield that is higher than most other options," Pearse says.

"They just need to be aware there are capital risks associated with the investment and that's a trade-off."

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