Listed property worth a look

Posted On Monday, 14 June 2004 02:00 Published by eProp Commercial Property News
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The sector offers good value relative to cash or bonds, writes Chris Needham

Mike FlaxThe biggest investment that most individuals will make in their livesis usually in their own residential property.

However, residential property is a relatively illiquid asset class.Unlike shares on the stock exchange, where liquid stocks can be boughtand sold at the click of a mouse button, transacting in real estate usuallyrequires paperwork and a lengthy transfer period.

For those investors who are keen to invest in sectors other than residential,the JSE Securities Exchange has a listed pro perty sector containing propertyunit trusts (PUTs) and property loan stocks (PLSs).

Bernard Fick, head of Alexander Forbes Asset Consultants, defines PLSsas listed property companies whose underlying assets are also investmentproperties.

Fick says rental income is the main source of revenue for a listed property company. This revenue is protected within the ambit of a lease contractnegotiated with tenants.

Most lease contracts contain escalation clauses, so unlike bonds wherethe interest received is set, a Bernard Fick has the potentialto increase its rental income if vacancies and rental levels remain staticor improve.

Property's limited correlation with other asset classes has particularadvantages from a portfolio diversification perspective, Fick says.

Victor Hugo, an asset manager and independent strategist with,is bullish on property in general.

He says the stronger rand is an important positive factor as it encourageslong-term investment in South Africa. He believes real growth is on theway for the country because it is now being seen favourably from outside.

South Africans are still conservatively borrowed compared with theirUS and UK counterparts, and property prices are still low in global terms,he says.

South Africa is a resources producer and the gateway to Southern Africa,and as such "we are attracting investment from the East, the Muslim worldand the West".

He sees interest rates moving sideways to down in the near future anda climbing trend in the longer term (more than six months) for the randand the real estate sector.

Hugo says there may be sideways consolidation for a few months but thefundamentals for property remain intact.

He says the trend over one year and longer for the JSE Property Trustindex is up, having moved sideways since early 1987. Since the middle oflast year it broke out above its typi cal range, which is usually considereda medium- to long-term bullish indicator.

 There may be dip-buying opportunities in coming months.

Hugo says the sector offers a 'super" yield of 11% before tax plus capitalupside and suggests that investors keep an eye on Grayprop, Putprop andthe high-yielding ApexHi B units.

Mike Flax, CEO of Spearhead Property Holdings, says there is a strongcorrelation between the long bond curve and the cap rates on listed propertyfunds. The sector moves in a fairly tight band of 150 points above longbonds.

He says some sectors of commercial property have seen up to 20% growthin rental, and the office market could follow suit in the next two years.

Flax says rental growth should offset any setbacks from a possible short-termincrease in interest rates. Angelique de Rauville, managing director ofProvest, an Investec property group member, says: "All that is requiredfor listed property to perform is a stable interest rate."

Assuming South Africa continues to enjoy a stable interest rate environment,the listed property sector will remain attractive, she says.

She predicts the sector will continue to outperform cash and bonds inthe near future due to strong earnings growth. A conservative estimateon a 12-month rolling yield, she says, is 4%-6% earnings growth for thesector.

De Rauville says there has been a "remarkable decrease in vacancies"in the retail sector because of lower interest rates, which boost consumerspending, and in industrial rentals as well, despite talk of the strongrand affecting companies.

Office vacancies also appear to be falling on the back of the economylooking more robust.

De Rauville says PLSs are a "suitable investment asset class for moderaterisk but listed property also provides more aggressive investors the idealasset class to gear against".

She says listed property offers good value at current levels relativeto cash and bonds.

Last modified on Tuesday, 13 May 2014 12:14

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