Good time to buy cash flow

Posted On Tuesday, 12 February 2008 02:00 Published by eProp Commercial Property News
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With share prices of property stocks down around 15% over the past month, the income yields available on some counters have now breached 10%

Andre StadlerA year ago, listed property investors would have had to be satisfied with an income return of a rather pedestrian 7%, which at the time was still below that of bond yields. 

Key question, of course, is whether it's now a good time for investors to bulk up exposure to real estate or could prices tumble (and yields rise) further? Macquarie First South Securities property analyst Leon Allison says global market uncertainty makes it difficult to predict share price movements. Based on current property fundamentals such as low vacancies and firm rental growth and assuming the current bond yield is maintained, Allison expects capital growth of around 8% over the next 12 months. But he cautions that there's a chance that property share prices could show no growth or even a decline in 2008. "It all depends on investor sentiment, local and abroad."

However, Allison says for income chasers the sector undoubtedly offers a buying opportunity with one-year income-returns averaging close to 9%. That places his total return forecast for the next 12 months at around 17%. Allison notes that counters such as ApexHi A (1350c), ApexHi B (1700c) and Hospitality B (1780c) are trading on double-digit forward yields of 10,4%, 10,1% and 10,6% respectively. 
Says Allison: "If one has a long-term view, then current volatility in share prices matters little. Listed property remains attractive as an income play relative to bonds, particularly given the fact that income payouts are still expected to grow at between 10% and 12%/year over the next three years."
Catalyst Fund Managers MD André Stadler agrees that the strong growth element of property's underlying income stream will continue to underpin the long-term attractiveness of the sector relative to cash and bonds. "The income yield on listed property grows whereas the income yields on cash and bonds do not."
The extent to which property investors have already seen income payouts accelerate over the past three years is clearly reflected by the following figures from Catalyst Fund Managers: In 2004, ten of the sector's biggest stocks declared average distribution growth of 5,02%. In 2007 distribution growth for the same 10 stocks had risen more than threefold to 16,34%. 

Nedcor Securities property analyst Evan Robins says current price levels are difficult to justify given the rate at which income payouts have increased. "Although slowing economic momentum can put a brake on the rate of income growth over the next 12 months, distributions cannot fall even close to the level implied in the sector's current pricing. Property fell with the market in general. There was no specific data to justify a fall of this magnitude."

"Besides," says Robins, "the outlook for rental growth remains positive, particularly for office and industrial buildings." Latest SAPOA figures show that a number of popular office nodes now have an office vacancy of below 2%. Although this scenario usually prompts an explosion of new development, this has yet to happen. Rising building costs, delays in town planning approval, higher interest rates, infrastructure bottlenecks and electricity supply shortages are making new projects less viable. "In this environment rents should rise further." 

Robins says property valuators Rode & Associates are forecasting office and industrial rental growth to average around 18% and 19%/annum respectively over the next five years. 

However, there are risk factors that could put further pressure on the property sector in the comings months. Robins says this includes, among others, a contagion effect from listed property markets in developed countries, which have fallen much further than SA property stocks in recent months. Bond yields could also be vulnerable to rand weakness. The need to finance infrastructure coupled to the deterioration in economic growth prospects, could also negatively affect property's positive fundamentals. "But when the dust settles, the sector will offer a value-buying opportunity." 

Meanwhile, jittery investors are bound to keep a close watch on company earnings forecasts when results are published over the next few weeks. Around two thirds of the listed property sector's 25 funds are expected to report in February. 

Last modified on Tuesday, 22 April 2014 12:43

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