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Reasons to buy property stocks

Johannesburg - The JSE's R95bn listed property sector has posted a strong rally in recent weeks and remained a better bet for income chasers than cash, bonds or equities, real estate analysts have said.

The SA Listed Property Index (SAPY) delivered a total return of 7.84% in July following negative growth of -2.98% and -1.81% respectively in May and June, according to latest figures from Cape-based Catalyst Fund Managers.

This means that the total combined return for the sector has increased to 5.41% for the year to date (January to July).

However, the performance gap between the individual winners and losers among the sector's 20 counters has widened substantially in recent months, suggesting that listed property investors need to become far more discerning in their stock selection.

"Stock-picking has now become the name of the game," said Catalyst Fund Managers Investment Manager Paul Duncan in an interview. Catalyst figures show that the difference in total returns between the best- and worst-performing property stocks from January to July is a whopping 47%.

Investors who bought shares in top performer Redefine at the beginning of the year would have earned a total return of close to 27% over the past seven months, said Duncan.

In comparison, investors who put their money into hotel niche fund Hospitality B would have seen total returns slump by -20%. The latter issued a trading update in June warning shareholders that occupancies and revenues at most of its hotels have taken a sharp dive in 2009.

Other top performers for the year to date include the two funds involved in the merger with Redefine, which are ApexHi C (21.65%), Madison (19.05%), ApexHi B (19.02%) and ApexHi A (16.9%). ApexHi and Madison will be delisted on August 18.

There are others. Premium has gained 12.91%, Capital (12.30%) and Acucap (9.94%). Counters besides Hospitality B that produced negative total returns over the seven-month period are Octodec (-7.15%) and Growthpoint (-5.12%).

Duncan said investors were increasing their exposure to property stocks on the back of a general decrease in risk-aversion, even though the strong performance of South African property stocks in July was supported by the rally in the funds associated with the Redefine merger.

There also appeared to be renewed appetite for investments that offer predictable and growing income streams.

Keillen Ndlovu, co-head of Stanlib's property franchise, said listed property was now a better bet than equities, cash or bonds for those looking for a regular and high income.

The reason why listed property was particularly popular among income chasers like retirees and pension funds was that property companies have to pass virtually all of their rental income on to investors in the form of quarterly or bi-annual distributions, said Ndlovu.

Property funds' income is generated by tenants who rent space in the shopping centres, offices and industrial buildings owned by these funds.

Difference in the dividend

Although distributions from property companies are similar to the dividends paid by general equity stocks, the big difference is that general equity companies don't pass most of their profits on to shareholders and can alter their dividend policy when needed.

Listed property stocks also offer a higher initial yield than other income-focused investments such as bonds and cash. Forward yields on listed property are currently sitting at 10% while bonds and cash are at 9% and 8.5% respectively, said Ndlovu.

Another key attraction, said Ndlovu, is that listed property investors will continue to see their income payouts grow while investors in cash and bonds will not.

Property stocks were still expected to record an average 7% to 8% growth in the income they distributed to investors over the next 12 months, despite an uptick in vacancies and rental arrears, she said.

Bonds, on the other hand, give a flat coupon rate while the yield or interest earned on cash (money market funds) has come down on the back of recent interest rate cuts.

The reason why listed property funds can grow their income over time is simply that the lease agreements landlords sign with tenants who rent space in their buildings include annual escalations typically set at between 7% and 9% per year.

Listed property was also a good diversifier from outright ownership of physical property, as it was more liquid and offered diversification between different sectors and buildings.

"Investors also don't have the hassle of being involved in collecting rentals, fixing lifts and air conditioners or negotiating lease contracts with tenants," she said.

- Fin24.com

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