Nedgroup Investment fund managers believe that despite the property market’s poor run — it has returned a negative 20% over the past 12 months — property valuations are still not starting to look attractive.

In the short term, at least, other asset classes offer better value, they say.

Nedgroup says that for a long time South African investors have been handsomely rewarded for investing in property and many regarded this as a relatively “risk less” asset class.

However, due to the property market’s poor run, many investors are now realising the true risks of their investments.

Daniel Malan, a co-manager of the Nedgroup Investments Managed Fund, said his research showed that listed property vehicles currently offered no value to investors, in terms of a standalone asset and in relative terms.

“Investors in listed property currently receive a negative real yield compared with a 1%-2% real yield in cash and money market instruments,” Malan said.

He did not see any point in accepting price risk in return for a lower yield than a comparatively “safe” asset class.

Nedgroup Investments Rainmaker and Entrepreneur Funds co-manager Omri Thomas said property companies were valued relative to the long bond yield.

In 2000, property companies were trading at yields substantially higher than the then reigning long bond yield at 12,5%.

“Subsequently, we saw a material reduction in the inflation rate driving the long bond yield to below 8% in 2007; property yields moving at a discount to the long bond yield; healthy distribution growth; and the expansion of property portfolios.”

While those factors resulted in significant capital and income growth for property companies, the picture “changed dramatically” in the middle of last year.

“Inflation continued to surprise on the upside, driving bond yields from below 8% to above 10%. This, in turn, had a negative impact on property valuations affecting the performance of the sector.

“Going forward, decent distribution growth will be offset by continued high inflation, a slowing economy, electricity shortages and a weakening rand.

“Liquidity in the property companies also remains a concern and, therefore, it looks to be too early to reinvest into the property sector.”

William Fraser — speaking on behalf of the Nedgroup Investments Value and Stable Funds — said yields would probably rise over the short term, meaning some further weakness on the property side.

But he said the distribution growth cycle remained intact and growth of 10% a year over the next three years “is not out of the question”.

Fraser said that over the shorter term, cash would probably do better than listed property, but on a three-year view, listed property would perform significantly better.