Soaring listed sector still has some puff left in it

Posted On Tuesday, 07 March 2006 02:00 Published by eProp Commercial Property News
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On the back of a strong run over the past three years, the listed property sector is expected to produce a total return of 16% over the next year - made up of 10% growth in distributions and 6% growth in capital.

James TempletonThe market has already run hard so far this year, up by 5.9% in January and 6.7% in February, which is a good indication that the demand for listed property is still robust.

Overall, we can expect a reasonable return for the sector this year but definitely not as spectacular as in the previous years. The JSE's listed property index delivered total returns of 50% last year compared with 41% in both 2003 and 2004.

On fundamental valuations, the sector appears fully priced since its average historical yield looks expensive at just over 6.5%.

In addition, the sector has totally discounted possible interest-rate cuts - and there is likely to be a 0.5% cut in the second half of the year. Any surprises in the prices of listed property could therefore be negative in future.

The market capitalisation of the listed property sector is over R50-billion - which will be significantly boosted by the latest acquisitions made by Growthpoint and Apexhi.

Other listed property companies which are particularly attractive include Grayprop, Sycom and Emira. There's still room for substantial growth in Emira, which is in the RMB stable, as it could buy properties from RMB, which would have a positive impact on its portfolio and returns.

Of the various listed property subsectors, commercial property will be the star performer. Although industrial property has been re-rated strongly over the last 18 months on the back of increased demand and limited supply of space, commercial property is expected to steam ahead due to the increased demand for A-grade offices.

Lack of supply in the commercial property sector due to high building costs and constraints on zoning have also resulted in increased rentals for the sector.

In residential property, increased building costs and the oversupply of residential space have resulted in slower growth in building activity. Growth in building activity in the commercial sector will be driven by the upgrading of existing property rather than by new developments.

The Property Charter is due to be finalised this year, but financing empowerment transactions could prove to be difficult because the sector has run quite hard. However, the effect of empowerment transactions on the sector should not be a cause for concern. Once the transactions take place, there will probably be some dilution in earnings of specific companies but in the long term it will be positive.

While the outlook for the listed property sector continues to be positive, this view is decidedly more guarded than in the past, with returns likely to be driven largely by lower interest rates. 

Last modified on Thursday, 08 May 2014 08:45

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