Optimism on capital losses

Posted On Wednesday, 25 February 2004 02:00 Published by eProp Commercial Property News
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CAPITAL losses in the listed property sector may not materialise this year in fact the sector is expected to post a small capital increase of about 2%.

Property-Housing-ResidentialThat is the view of Andisa Securities property analyst Len van Niekerk, who says that a rise in bond yields usually leads to a rise in listed property yields.

In other words, prices come down when yields go up. The performance of listed property tends to track long bonds, because both are income-generating investments.

Van Niekerk says bond yields are expected to rise 10% by the end of the year, sustaining capital losses, but the listed property sector is expected to post a small capital increase of about 2%.

The difference in the capital movement can be explained firstly by the fact that prices in the listed property sector have already decreased, absorbing some of the negative impact of rising bond yields, says Van Niekerk.

Secondly, the risk spread over the R153 long bond is expected to decrease, says Van Niekerk.

"That is, property will rerate relative to bonds."

Van Niekerk says that listed property yields follow the bond market closely in the absence of distribution growth, but when growth picks up, as he believes it will, property yields can warrant trading at a smaller premium over bonds.

"Property fundamentals are showing signs of improving and are expected to translate into an increase in distribution growth, something that has been absent from the market for about two to three years."

Van Niekerk says retail property will be supported by consumption expenditure, while office rentals have stabilised at about R60/m² to R65/m² for A-grade office space.

He says the risk of downward pressure on distributions is decreasing as office leases that were signed at the top of the last cycle in 2000-01 are expiring and being reviewed.

He says Andisa's interaction with listed property companies with a significant exposure to the industrial property market has revealed that industrial market rentals are starting to increase slightly, for example from R16/m² to R18/m².

Pangbourne Properties, which has a large exposure to industrial properties, agrees with Van Niekerk.

Pangbourne CEO Athol Campbell, says that when it released financial results last week, it indicated that one area that has improved rapidly in terms of industrial properties is the greater Durban area. He says that will also affect fellow loan stock heavyweight Martprop, which has industrial property exposure in the same area.

"We've also seen rentals hardening, particularly on the East Rand. We've got no vacancies of any significance on the East Rand at all."

Pangbourne says it has also seen a take-up of space in Midrand and Linbro industrial parks.

Martprop MD Roger Perkin says that over the past three or four years Martprop has seen earnings negatively affected by the renewal of leases at lower rates.

"We are starting to see that rentals concluded three years ago and that have escalated at 10% are still at or below current market rentals. There is some growth coming through and obviously there is an opportunity for further growth as new leases are signed with fixed escalations," says Perkin.

Last modified on Monday, 12 May 2014 14:08

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