Market remains under pressure

Posted On Friday, 01 February 2002 03:01 Published by eProp Commercial Property News
Rate this item
(0 votes)

But listed sector is starting to offer good buying opportunities for investors

James TempletonANALYSTS agree that the property market is currently fairly soft across all sectors with an oversupplied office market, muted retail conditions and an industrial sector with low levels of demand.

Francois Viruly from Viruly Consulting expects the sluggish international and domestic economic growth to reduce the level of demand for property in 2002.

He reckons in addition to recent rand volatility, property investors will be carefully anticipating potential increases in the interest rate. Higher interest rates not only affect the debt servicing on investments, but also impact negatively on consumer expenditure.

``It is important to underline that the changing structure of the property sector, with a greater emphasis placed on debt financing, means that the sector has generally become more sensitive to interest rate movements.

Viruly says prospects for the retail sector will continue to be closely correlated to the performance of consumption expenditure. The high level of indebtness of South African consumers continues to place downward pressure on the clothing and furniture sectors.

Furthermore, het reckons that during the course of 2002, property owners will pay careful attention to inflation forecasts and the ability of macro-economic policy to keep the inflation rate in the target range of 3% to 6%. The recent decline in the inflation rate has made it difficult for property owners to maintain the historical 12% norm in annual rental escalations, but in 2002 it seems that property owners will try to establish whether higher inflationary expectations justify a move back to higher contractual rental escalations.

``An oversupplied market and highly competitive market environment will, however, in all likelihood reduce the scope for a rise in escalation rates.’’

The relatively weak fundamentals have, of course, already impacted on the listed property sectors. Last 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 29% 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.

But despite weaker market conditions, analysts believe that the sector is beginning to offer good buying opportunities as 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 PUT’s are only allowed to borrow up to 30% to finance portfolios.

But Templeton points out that on a price relative basis, the PLs sector has outperfomed the PUT sector since the beginning of 1999. He says this period of realtive outperformance by the PLS index was likely as a result of the benefits of significantly lower interets rates on the more highly geraed loan stock companies. Templeton expects the trend to continue for the immediate future, with growth forecasts for the PLS sector ahead of that of the PUT sector.

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%, one 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 this year. Boonzaaier’s favourite funds are Martprop and Grayprop, while he regards Sycom, Hyprop and Redefine also as potentially good buys.

Last modified on Tuesday, 29 April 2014 11:47

Please publish modules in offcanvas position.