Property's compound income:The eighth wonder (almost)

Posted On Friday, 07 March 2008 02:00 Published by
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The decline in the global property market seems to be passing SA by

The decline in the global property market seems to be passing SA by — just as the decade-long worldwide boom did. A spate of results in SA shows payouts from listed property funds reaching new highs. Those who run the funds expect the good times to go on. But some analysts aren’t so sure.

Hyprop, the sector’s bluest blue-chip, announced a 20% increase in payout to 270c for the year to December 2007, after a 17% increase in 2006 and 12% in 2005. The sector minnow, Monyetla, achieved 37,2% growth, just pipping fund manager Madison’s 36,8%. Despite growth of less than 3% compared with the same quarter last year from ApexHi, the 17 counters announcing results in the past few weeks showed average payout growth of 14,5%.

More important is that, global credit crunch or not, SA fund managers expect another year of 12,5%-14,5% increases.

How can they be so sure in the face of high interest rates, deteriorating confidence, double-digit inflation in building costs, and economic growth restrained by the electricity crisis?

Investec Property’s Angelique de Rauville thinks they’re being too optimistic. “There’s an inherent earnings-growth bullishness, albeit slightly more muted, from many of these companies,” she says. “We are expecting earnings growth of 11,6% (down from 14,6%), but this is still double the growth the sector has achieved since its inception in the late 1970s and early 1980s.

“Our outlook would probably be considered one of the most conservative in the industry,” she says. “We have concerns around the slowdown, if not recession, in global economies. We have local concerns driven by the inflationary environment, higher interest rates, slower growth and expected lacklustre consumer spending.”

Hyprop CEO Peter Prinsloo and Norbert Sasse, CEO of sector giant Growthpoint, agree with De Rauville’s concerns — but they stick to their forecasts. Says Sasse: “We are comfortable with double-digit growth in payouts for the next couple of years even with much lower economic growth, our leases in place, low vacancies and fixed interest rates.”

Property is an income investment that is steady, predictable and growing over the long term. Its effect is much like compound interest — which Albert Einstein is said to have called the eighth wonder of the world.

Normally that growth comes in low single digits. But SA property is in a unique place. It suffered 30 years of decline from the early 1970s — under pressure from political uncertainty, booms and busts, and rising interest rates. In 1969 there were more than 20 listed property developers and investors, who disappeared when interest rates rose to 13% after the first oil crisis in 1973.

Recovery started in the late 1990s when private investors were more confident of the new regime’s political and economic management. But the 30-year hiatus means the sector is still stunted from too little development. There is too little office and industrial space for SA’s growing businesses.

Some of the weaknesses can be strengths — for instance, building costs. Madison executive director Marc Wainer says any new office space in Sandton CBD will need to get rent of R170/m²-R200/m² to justify developing it. “This will immediately re-price the existing office stock, which is now renting at R100/m²,” he says.

Eskom constraints on development mean higher rents and more payout growth. As rents grow faster than costs, the payouts will continue to rise, even after the recovery is over.

Once a property portfolio is listed, its share price starts to display the volatility of ordinary corporations, despite the steady income. That’s what’s happening now. At the time of going to press, Growthpoint was 2,2% down at R14,25 (giving a 7,4% forward yield) from last week. It was recently at R12,75 (8,2%). This volatility will continue, opening a unique opportunity to buy unusually high and (almost) certain income.

What to buy? De Rauville says: “We support companies that produce strong earnings growth, but not in isolation. For example, Monyetla is not favoured because of inherent problems within its portfolio. Underlying assets and management ability are also important.

“We continue to favour Growthpoint, Redefine and ApexHi as our top picks. We also favour Octodec and Premium, though they have liquidity issues.” - Ian Fife

Source: Financial Mail

Publisher: I-Net Bridge
Source: I-Net Bridge

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