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Posted On Monday, 31 January 2005 02:00 Published by eProp Commercial Property News
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Listed property made investors rich last year, but is it 2005’s best buy, ask Adele Shevel and Chris Needham

Angelique de RauvilleListed property has been possibly the most hyped sector of late, drawing investors’ attention with its returns of more than 30% per annum for the past two years, beating the return on the All Share Index (25.5% in 2004).

The sector has regained its popularity with retail investors so strongly that several locally domiciled unit trust funds have closed their doors to new investment.

With such hefty returns to its credit, and more to come, surely the sector — usually seen as less risky than other parts of the JSE — would be 2005’s best buy?

Angelique de Rauville, managing director of Provest, the listed property investment arm of Investec, said the SA economy was stable and growing and inflation was under control — all great for listed property.

She said she expected a total return of between 14% and 16% from the sector for 2005.

"Of that, between 10% and 12% is income and between 4% and 6% [will come] from capital growth.

"That’s based on a conservative outlook on bonds and interest rates, assuming no movement."

Not a bad nominal return, especially when returns from equities generally look less rosy.

Alwyn van der Merwe, senior portfolio manager at Old Mutual Asset Managers (Omam), said this week: "We expect companies to grow their profits by approximately 9% to 11%. Add to this the additional 3% expected dividend yield and we derive an expected longer-term nominal return from equities of between 12% and 14%."

De Rauville said if prime lending rates fell and the bond market strengthened, "we would expect total returns [on listed property] to exceed 20% a year".

This soundly beats the return on cash, which Omam put at a nominal 6.5% to 7.5%, with bonds a bit better at 7.5% to 9.5%.

Though there is no agreement about whether there will be an interest-rate cut — Provest anticipates a cut while Stanlib expects rates to stay flat — the fundamentals are in place for a good year.

Listed property companies are expected to increase their distributable earnings faster than they have over the past five years.

Within the sector, "we still expect the retail sector to outperform industrial and commercial, though we’re expecting an upward surge in industrial rentals and office rentals", De Rauville said.

Gerald Nelson, vice-chairman of the Association of Property Unit Trusts, said he expected further growth in listed property on the back of strong fundamentals.

Nelson said the average forward yield for listed property was 9.5% and expected earnings growth over the next 12 months of about 5% should translate into similar growth in capital value, adding up to a total return of about 15%.

Mike Flax, CEO of Spearhead Property Holdings, estimated the total return would be between 15% and 20% over each of the next two years, of which about half would come from income yield (interest) and half from capital growth.

Flax said that listed property had re-rated thanks to lower interest rates.

"The next set of re-rating for listed property will come through in fundamental profit growth.

"That should be able to sustain growth in the listed property sector in the next three years, though nowhere near the type of returns investors have got over the past two years."

Not everyone’s buying now, however: Marc Thomas, marketing director for The Income Specialists, a division of Marriott, said: "We’re not bullish at all — but we don’t like making one-year predictions." Marriott preferred to take a longer, two to five-year view, he said.

He reckoned that the bulls "may very well be right if interest rates come down and everything stays positive". However, in three to five years’ time the yield on listed property will be higher.

Thomas said it was better for investors to buy into the sector at a sensible time.

The long-term average yield for the sector is between 10% and 11%, and is running at about 8% now.

"Investing now not only locks you into that yield, but means you could experience a capital loss if yields pick up again," he said.

Last modified on Tuesday, 13 May 2014 14:27

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