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Listed funds get real

Posted On Tuesday, 12 February 2008 02:00 Published by eProp Commercial Property News
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Property shares appear to be settling around 15% below their level of late last year, disconnecting from the recovery in the overall JSE

Marc WainerAverage forward yields have risen to around 8,5%, about the same as the R157 long bond, and most investors think that reflects the risk/return the funds should give.

As with long bonds, property is at its best as an income investment, though property yields are usually higher than those of bonds because of the risk.

Double-digit rent rises over the next three or four years should justify their being on a par, but analysts and fund managers have fretted that the sector yields have traded below the long bond for the past year or so - a clear sign that the market was momentum-driven, because of the simple fact that there were more buyers than sellers in a listed property sector that is still undeveloped as it recovers from pre-1994 decline.

Most worrying was that the sector seemed immune to rising interest rates and the global credit meltdown.

"We've been saying for some time that the sector is about 15% overvalued, whichever way you value it, so hopefully it will stabilise at current levels," says Marc Wainer, director of Madison, the sector's largest fund manager with about R30bn in properties in three funds - Redefine, ApexHi and Hyprop.

Independent property fund analyst Liliane Barnard agrees that the sector has reached a logical level for the short term. "The higher trading turnovers in the sector today (as the FM was going to press on Tuesday) could indicate that investors who were hanging onto their shares in the hopes of a rebound have accepted the 15% drop as a kind of floor," says Barnard.

Fund managers who took a view on the over valuation last year have made a killing. For instance, Investec Property under Angelique de Rauville unloaded a few hundred million rand of Growthpoint shares to the Public Investment Corp in September and October last year at around 1 700c - a forward yield of 6,1%. She also sold other stock to build a cash pile in excess of R1bn.

" SA was starting to look expensive relative to the cost of local borrowings," she says. "After all, property is in part about cash flow. Also, SA was operating in isolation from the global credit crunch.

"All indications were that no country or sector could be immune to the negative effects associated with the liquidity crisis. The SA property sector was not adjusting for this."

On January 31 Growthpoint stood at 1 400c, which would give De Rauville a forward yield of 7,4% if she bought now and 10% in three years, with an average pay out increase of 10%/year.

But De Rauville is in no hurry to go back into the market. "We're comfortable with our cash position but are keeping a close eye on the SA and other global property markets," she says.

"Some are looking close to offering real value, even adjusting for political and economic risks in many markets at the moment. The real opportunities are likely to surface in the next six to 18 months. We haven't seen the end of the negative implications of the credit issues and the potential US recession."

Barnard agrees that the sector, like the rest of the global stock exchanges, faces further volatility and perhaps even lower prices. "Even so, there are some stocks that could be bought selectively, particularly the funds that will be announcing payouts in the next month or so," she says. "If you buy them now, you will receive three payouts in the next 13 months that give exceptional income returns." These include ApexHi B (13-month payout 210,65c, annualised yield 12,72%), Hospitality B (total payout 237,2c, annualised yield 12,3%) and Madison (total payout 125,88c, annualised yield 14,1%).

Wainer expects those share prices to bump up a little in the next while, as their closed periods end. Directors and fund managers who were prohibited from buying during those times will move into the market. "Prices always seem to drop in the closed period and rise when it ends," he notes.

There are plenty of reasons why the sector will suffer further falls. It could follow the overall market down at the end of February, when more international banks announce their subprime losses and nervousness sets in again.

There will be more stop-loss selling as investors adjust their gearing. Retail investors dumping unit trusts could trigger further sales. Nobody knows where the bottom is, or was. So the best time to buy is probably when the forward yields are what you are happy with.

Last modified on Tuesday, 22 April 2014 12:55

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