Good run coming to an end

Posted On Friday, 01 February 2002 03:01 Published by eProp Commercial Property News
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But some PUT’s and PLS’s are starting to look cheap.

James TempletonLAST year, property unit trusts (PUT’s) and loan stocks (PLS’s) underperformed the overall stock market for the first time in five years.

The listed property sector (notably PUT’s) has declined sharply since September, resulting in weaker than expected returns for the year. The PUT index shed some 6% last year, while the PLS index only just managed to stay in positive territory with growth of 3,5%. If dividend yield is added, the two counters achieved total returns of 8% and 19% for the year respectively, which was lower than the Alsi’s 26% rise last year.

The sector has been under further pressure since the beginning of this year. And the bad news is that prospects for the remainder of the year are also not too rosy.

James Templeton, property analyst at Barnard Jacobs Mellet, says chances are that the property sector will once again underperform the overall market this year as the growth in earnings of property funds is adversely affected by poor fundamentals.

Rising interest rates, slower economic growth, an oversupply of commercial space and declining rentals are the main reasons for the weaker prospects.

Templeton points out that a heavyweight like Grayprop (the sector’s largest fund with a market cap of some R1,8bn) has already indicated that there was unlikely to be any growth in distributions from the fund in the current financial year. Under the current circumstances the sector is also unlikely to attract many new listings, he reckons. Until recently, it was generally expected that quite a number of institutions would bring their portfolios to the market, thus enhancing the size and liquidity of the listed property counters.

Gerald Nelson, chairman of the Association of Property Unit Trusts, says that the oversupply of commercial space is of particular concern to the industry. He points out that the decentralised office market is the sector with the highest vacancies. To such an extent, that landlords who want to retain tenants after rental contracts have expired, have to be satisfied with renewing leases at lower rentals.

Recent figures of the SA Property Owners Association (Sapoa) confirm that more and more office space is standing vacant. For the first time in years, there are currently double-figure vacancies in sought-after decentralised office nodes like Sandton, Rosebank, Hyde Park and Rivonia in Greater Johannesburg, as well as in Claremont and Rondebosch in Cape Town.

But despite weaker market conditions, analysts believe that the sector is beginning to offer good buying opportunities. And many of the shares are now trading at a discount to net asset value. Harry Boonzaaier, property analyst at Merrill Lynch, says the last few months saw prices declining to the extent that investors can enter the market failry cheaply. And even though the earnings growth of many funds are under pressure, current dividend yields of 15% on average means that the sector remains attractive to those who are more interested in income than capital growth.

However, in the current climate investors would do well to look more closely at the quality of underlying portfolios, Boonzaaier cautions. Vacancies, the lease expiry profile, the location of buildings and the debt position (are interest rates fixed?) are all important considerations impacting on the performance of property funds.

Boonzaaier says that with higher interest rates funds with lower gearing currently offer the smallest risk. This means PUT’s are generally less risky than PLS’s as there’s a restriction on how much PUT’s are allowed to borrow to finance their portfolios.

Boonzaaier says investors can estimate the total returns of a specific fund by adding expected earnings growth to forward dividend yields. If a specific fund expects no growth in dividends for the year (as does Grayprop), its forward yield will have to be high enough to compensate for this. By way of illustration: Say fund A’s dividend growth for the year is expected to be 6% and its dividend yield is 12%. Fund B expects no dividend growth, but offers a dividend yield of 18%. In both cases you would get a total return of 18%. Analysts expect average dividend growth for the sector to be in the region of 3% this year. At a future dividend yield of around 15%, you could therefore expect to see a total return of 18% for the sector in 2002.

Templeton reckons Hyprop, Growthpoint and Metboard will be the top performers in this year. Boonzaaier’s favourite funds are Martprop and Grayprop, while he regards Sycom, Hyprop and Redefine also as potentially good buys.(see table).

Last modified on Monday, 28 April 2014 12:15

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