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Property stocks feel pressure

Posted On Wednesday, 06 June 2007 02:00 Published by eProp Commercial Property News
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The property loan stock index of the JSE trades up to 1,360 points around a week ago, but closes having sunk to around the 1,260 level today on higher than expected inflation data and raised expectations of a rate hike.

Marc WainerClassic Business Day gets Marc Wainer from Madison Property Fund Managers on the line;

LINDSAY WILLIAMS: Marc, it’s been a fairly torrid time - is there more pain to come?

MARC WAINER: Yes and no. If we go back 12 months to 8 June 2006 we had an unexpected 50 basis points increase, and in a very short space of time the listed property sector came off on average 27% where in the last eight days in anticipation of a 50 basis points increase on Thursday that’s been about 7% or 8%.

LINDSAY WILLIAMS: So you’re saying this isn’t too bad at all?

MARC WAINER: You have to remember that the listed property sector is really an income play rather than an equity play, and if you look at the numbers the market is saying if interest rate are going up 50 basis points my alternative investments - let’s say cash - is going to give me 50 basis points more, and they’ve adjusted for it. That would give you about 7%. So I think it’s in line - I think that the market was very strong, perhaps too strong - so some correction was in fact necessary. Very healthy volumes have been going through on most counters - on the more liquid ones - so there have been a lot of buying opportunities and for every seller there’s been a buyer. Obviously what’s happened is although the market has reacted to the potential interest rate increase the fundamentals in terms of earnings are still there, and over the next 12 months the better performing funds are going to grow anything between 12% and 20% in terms of their earnings growth.

LINDSAY WILLIAMS: As you say it is an income play so there’s an opportunity cost factor here and an adjustment factor so it’s just come down a little bit. With that interest rate decision of June 2006 the market had come down anyway because there was that traditional May wobble - one could have picked up the property loan stocks index below 800 points 11 months ago, so that’s been a tremendous run-up to the high around 1,345 points. It’s now around 1,260 points - the big question is could this be the start of a more meaningful correction with potential further interest rate rises, or is that 50 basis points enough? You pointed out it’s an income play - does that mean our ship should steady from here?

MARC WAINER: Obviously interest rates and any further increases in interest rates is something that’s completely beyond the control of the managers of the listed property funds, but what is within their control is the income they earn. What we are seeing last year, this year, and going forward for the next 12 months - and even beyond that - is the strongest growth in income ever. Normally to get 7%, 8% or 9% income out of a property fund was very good growth, but today if a fund reports 7% or 8% they get punished because their peers are producing 12%, 15%, 18% and up to 20% because of the fundamentals. So even if you take a 10% decrease in unit price of the shares the growth 12 months forward - assuming that’s where it stopped - you’re going to go back to that level and above simply because of this very strong growth. If you compare it the bonds are giving you a fixed income - so there’s going to be a premium or a discount to an R153 - but then with the strong growth that’s coming through on the property stocks people are going to say I’d rather be in a property stock even though it’s slightly riskier given the growth is so much higher.

LINDSAY WILLIAMS: And vacancies?

MARC WAINER: They’re virtually non-existent at 1.5%.

LINDSAY WILLIAMS: Precisely, and there’s no sign of those vacancies rising. I suppose that means the income stream will remain relatively buoyant - one can command some fairly decent increases when the leases come up for review.

MARC WAINER: Exactly. Building costs are enormously high, and it’s very difficult to get zoned serviced land. There are real barriers to entry, so on renewals one is now able to command much higher rentals than was the case in the past - so that’s powering through, and particularly in the industrial and now in the office sector.

LINDSAY WILLIAMS: You’ve convinced me completely. What do we go for? The big liquid stocks, the ones that are leaning towards retail?

MARC WAINER: That’s very difficult for me - I’m manager of three funds. I think if you look at the bigger funds - the funds that are showing good growth. You need to look at that because we’ve had yield compression - so up until now there’s been very little difference from a market point of view between the “best performers” and the “poorest performers”. Now with this adjustment that difference is coming through - so the more liquid ones clearly are better. Although I’m the manager - and I’m going to stick my head out here - I think that the strongest income growth that you’re going to see amongst the strongest is going to be Apex because its base is so low. Apex is coming off a very low base - so we are seeing very large increases in rentals on the renewals. The retail sector is still strong, but slowing. Office, industrial, and funds with large exposure to industrial are very good, and funds which are coming off a low base.

Last modified on Thursday, 24 April 2014 13:52

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