And now for the bad news ...

Posted On Monday, 04 April 2005 02:00 Published by eProp Commercial Property News
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Hot listed property market has run ahead of itself, while speculators in residential real estate should cash in.

Colin YoungThe recent sharp uptick in bond yields has given the investing public a wake-up call there are risks to investing, so diversify, diversify, diversify.

Bond yields apply particularly to South Africa's favourite asset class property still the topic of many a dinner-party conversation.

However rosy the fundamentals might be for physical property such as offices, retail, industrial and even residential, the listed property market is already ahead of itself.

Colin Young, portfolio manager of the Old Mutual SA Quoted Property Fund which bagged the Standard & Poors award last week for the top fund in the Flexible Property category over one year said much of the good news had already been priced into listed property counters.

This means the sector is unlikely to be South Africa's top asset class this year as it has been for the past two years.

The smart money moved into the listed property sector in the past two years to enjoy returns that made even the red-hot residential sector look pedestrian: 40.6% in the sector last year compared with a 27.8% increase in house prices , according to the Absa House Price Index for February.

Young says the rise in bond yields has taken a bit of the shine off the listed property sector. With regard to his fund, the annual rolling return dropped from 54% to 51% thanks to the move in bonds.

Young expects 6% growth in property companies distributions in the next 12 months on strong underlying property fundamentals but it would be a worrying trend if bonds keep tracking up.

He says the correlation of listed property to bonds is high and I dont want to sound too negative, but in the next month I am expecting a lower capital return but this doesnt mean it is a trend . Over the next year, dont expect any capital appreciation on a listed property investment, though Young still sees a reasonable yield for income investors of 9% -9.5%.

On the ground its positive but weve priced in the good news and perhaps the listed property sector needs to ease up a bit, he said.

Investors need to cool down their expectations for property, he said and not bet the farm on one asset class. When youre near the top of the market and worried about a sell-off you diversify its like a parachute, and right now parachuting down is good.

Craig Pheiffer, chief investment strategist of Sasfin, said property stocks have been our favourite for some time but investors have been spoilt and should not expect capital growth of listed stocks anymore.

Instead, listed property should be bought only in the expectation of yield.

Of the physical market Young said that residential property had enjoyed its boom and was headed towards saturation in certain nodes, while retail and industrial were still flourishing.

He said, however, that the underlying property fundamentals were in their best shape for 20 years and property developers were having a field day.

The message from Hansie Louw, managing director of Anam Cara Financial Coaching, is that now is not the best time for buy-to-let investments . For some investors in residential property it is, in fact, time to cash in.

Louw said that investors who bought a residential property say, 18 months ago, with a longterm view towards the assets growth, should continue to hold.

But those aiming to make a short-term profit should let it go and I definitely wouldnt advise people to buy residential [property as an investment] now unless its from a distress seller where they can get it for 10%-15% less than the asking price.

Now its probably better to get a couple of friends together and go into commercial or industrial property, he said .

Property economist Francois Viruly said of the popular buyto-let market: Theres too much supply and the yields are not attractive.

Anton de Leeuw, CEO of property educationists YDL, warned speculators that in prime areas such as Sandton, rentals had dropped and so yields had softened down to an average of about 5%-6%.

De Leeuw said those still wanting to invest in prime areas should plan for a reverse cash flow in other words, the rent you can charge on the property you buy to let will not cover the mortgage repayments , and you will have to pay in every month.

However, he said if you could manage that, it remains an excellent investment even though there is short-term oversupply of residential units in areas such as Sandton and more coming on stream over the next 18 months.

Many speculators will get their fingers burnt over the next year or two in those particular areas, he said.

De Leeuw said the property market was not uniform but made up of hundreds of smaller markets that have their own characteristics, which still afforded investors opportunities if they were prepared to look further afield.

Instead of a R600 000 flat in an area like Houghton, he said, first-time buyers could look on the outskirts of prime areas to get their foot on the property ladder such as Bellevue, where strong demand for living space can realise an average yield of 12% on a R100 000 flat.

If you cant afford it, buy where you can, but rent where you want, he said .

The golden rule was cash flow, he said the capital growth will look after itself if you get that right. 

Last modified on Saturday, 10 May 2014 14:38

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