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Unlike the listed real estate markets in Britain, the United States and Australia, South Africa’s R103bn listed property sector has so far emerged form the global recession with only a few minor bumps and bruises.
In fact, analysts have been surprised by the better-than-expected results still flowing from a number of listed property counters despite rising vacancies and slower rental growth.
True, average growth in income distributions slowed to around 8% in 2009 (down from 12% in 2008).
However, a handful of counters have still managed to grow income payouts at double-digit rates.
In terms of income growth the top performer among the 10 (out of 18) counters that have reported interim or full-year results in February was Redefine Properties, with 28.8% year-on-year growth in distributions for the three months to end-November 2009.
Inching back
That was the first set of results announced since Redefine’s R18bn mega-merger with sister funds ApexHi Properties and Madison Property Fund Managers became effective on 1 August last year.
Redefine joint CEO Wolf Cesman says although property companies are still facing tough trading conditions they’ve noted a slow improvement in arrears and bad debts.
Other property companies that have outperformed the market in terms of income growth are Capital Property Fund (+14.4% for the year to December), Resilient Property Income Fund (+14.21% to December) and Pangbourne Properties (+10.55% for the six months to December).
The Resilient group of companies manages all three of the latter funds.
Paul Duncan, analyst at Catalyst Fund Managers, says investors have been keeping a close watch on the results for an indication as to how property companies are performing in a weaker economic environment.
And although the property cycle tends to lag the economic cycle, Duncan says it appears most property funds will continue to achieve inflation-beating income growth over 2010.
Catalyst Fund Managers’ February overview of SA’s listed property sector shows despite a slight pull back in share prices in January property stocks delivered a total return of 15.09% over the 12 months to end-January.
That compares to a total return of 33.16% for general shares (Alsi), 8.75% for cash and -1.67% for bonds over the same period.
Overall winner
In terms of individual property stock performance for 2009, Vukile Property Fund emerged as the overall winner, with a total return of 30.73%.
That was followed by Capital Property Fund (29.75%), Premium Properties (28.9%), Pangbourne Properties (26.92%) and Redefine Properties (24.15%).
The worst performer for 2009 was hotel niche fund Hospitality B, with a negative total return of -31.46%.
Its hotel occupancies and revenues were hit by a massive slump in local and overseas tourism.
Growthpoint Properties (1.66%) and Octodec Investments (9.53%) also ended 2009 in the bottom three.
Although equities beat listed property in the performance stakes over the short term, Catalyst figures show over five years listed property has made more money for investors than any other asset class.
The JSE’s listed property sector delivered a total annualised return of 21.6% between 2005 and 2009 compared to the Alsi’s 20.3% over the same period.
Property stocks also beat cash (9.3%) and bonds (7.1%) over five years.
Real estate funds were also a better bet than shares, cash and bonds over three years.
Steady income
Duncan says the fact SA’s listed property sector is still providing a growing cash flow (unlike bank deposits and bonds, where the income is fixed) is what makes the sector so attractive relative to other income-generating assets.
Leon Allison, property analyst at stockbroking firm Macquarie First South Securities, holds a similar view.
In fact, Allison has recently upgraded his buying recommendation for the listed property sector, suggesting investors should be overweight in bricks and mortar this year.
Although Allison doesn’t expect exciting returns from listed property over the next 12 months, he says the high cash flow component makes property stocks a more attractive bet than other asset classes in what could be an uncertain, volatile environment.
Allison expects average income growth of 6% for the sector as a whole over the next 12 months.
“Our upgrade to overweight isn’t based on a value argument but rather a defensive one: a near certain 9,5% cash yield looks attractive in a potentially volatile environment and the muted returns expected from other asset classes.’’
Allison says Macquarie expects a total return of 9% for general equities (Alsi) over the next 12 months, of which the income portion (dividend yield) will be just 3%.
By comparison, listed property is expected to deliver a total return of 11%, with almost 10% of that comprising a relatively certain income stream (distribution yield).
Although shares and listed property will therefore deliver similar nominal returns in 2010, Allison notes property offers higher risk-adjusted returns.
Rental escalations
He adds: “In a lower economic growth and higher inflation environment property’s inflation hedge characteristics – such as built-in annual rent escalations – will also come increasingly into play.’’
Nevertheless, Allison cautions vacancies, bad debts and arrears may well continue to rise gradually in many listed property portfolios over the coming months. However, he says the level of vacancies, bad debts and arrears are generally manageable.
“The office sector seems the weakest, particularly in certain nodes, where vacancies have reached or even breached 10%. We expect overall vacancies to have ended at around 6% in 2009 and we forecast those to rise and peak at just more than 7% by year-end 2010.’’
Allison says a further risk to the sector – indeed, to the whole economy – is sharply rising electricity tariffs and municipal rates.
Although those costs are mostly passed on to tenants their cost of occupation rises, constraining their ability and willingness to pay higher rents.
Key question for investors is what sub-sector of the commercial property market is likely to perform best over the next 12 to 18 months?
Where in the business cycle?
Phil Barttram, head of research at Old Mutual Investment Group Property Investments (Omigpi), says there’s no doubt offices, retail and industrial property respond differently in different stages of the economic cycle.
“Property returns generally tend to lag the economic cycle and we expect nothing different this time round.”
However, Barttram notes international and local examples have shown the retail sector tends to outperform other segments during a sustained growth recovery, while offices tend to outperform in a more benign environment.
In line with that, Omigpi says investors should be overweight quality retail over the medium term, followed by industrial property and then offices.
Barttram says Omigpi’s forecast indicates retail will remain under pressure through first half 2010, given a reticent consumer and what it believes will be a dogged oversupply of retail space.
“As such, while we prefer retail we expect to see a dislocation of returns between dominant and peripheral centres in the upcoming cycle," said Barttram.
"We believe the retail sector overhang will exaggerate the pressure on the non-dominant retail centres. Research has shown the December sales boom provides a defensive buffer against seasonal trading variances and it’s the tenants in the dominant (often larger) centres that really benefit from that buffer."
“Our contention is even with the Soccer World Cup boost, restricted access to debt, a delayed consumer recovery and less than exceptional year-end trading will make competition for disposable spend even more critical over 2010,” he said.
Barttram says a smaller spending pool, combined with a material increase in supply, will lead to a geared decline in the non-defensive malls, as tenants look to focus their exposure in high performing centres.
“That leads to a snowball effect of higher vacancies, negative rental reversions and an inferior shopping experience, which ultimately translates into fewer shoppers in peripheral centres.”
Barttram says industrial property returns have traditionally shown a high correlation to retail returns, particularly in an economic upswing.
Omigpi believes industrial landlords will see increased demand for existing space throughout second half 2010.
“As capacity utilisation improves and inventory restocking continues, so more of existing space will be taken up.”
Barttram said unlike retail and offices the industrial segment has the benefit of relatively short gestation periods for new buildings, which has enabled that sector to limit the extent of any supply overhang.
“However, detracting from industrial property returns will be the strong rand and its impact on exports. That may restrict expansion plans by the larger companies, which will lead to dampened growth prospects.”
No short-term fixes
As for the office market, Barttram says in the previous property cycle returns were severely affected by an oversupply, with vacancies eventually peaking upwards of 20% in the early 2000s.
“Fortunately, this time around available space was at record lows when the country went into recession.
While we expect high vacancies to have a negative impact we don’t expect a return to the extremes seen in 2001 and 2002.”
However, Barttram warns against speculative developments with a completion date of 2011 and 2012.
“Our research has shown the time taken to work through an oversupply – once property returns have bottomed – could be anywhere between one and three years. That period is very similar to the development period of a large office project and investors could find a vacancy peak at the exact time they’re bringing space to market.”
- Finweek
In fact, analysts have been surprised by the better-than-expected results still flowing from a number of listed property counters despite rising vacancies and slower rental growth.
True, average growth in income distributions slowed to around 8% in 2009 (down from 12% in 2008).
However, a handful of counters have still managed to grow income payouts at double-digit rates.
In terms of income growth the top performer among the 10 (out of 18) counters that have reported interim or full-year results in February was Redefine Properties, with 28.8% year-on-year growth in distributions for the three months to end-November 2009.
Inching back
That was the first set of results announced since Redefine’s R18bn mega-merger with sister funds ApexHi Properties and Madison Property Fund Managers became effective on 1 August last year.
Redefine joint CEO Wolf Cesman says although property companies are still facing tough trading conditions they’ve noted a slow improvement in arrears and bad debts.
Other property companies that have outperformed the market in terms of income growth are Capital Property Fund (+14.4% for the year to December), Resilient Property Income Fund (+14.21% to December) and Pangbourne Properties (+10.55% for the six months to December).
The Resilient group of companies manages all three of the latter funds.
Paul Duncan, analyst at Catalyst Fund Managers, says investors have been keeping a close watch on the results for an indication as to how property companies are performing in a weaker economic environment.
And although the property cycle tends to lag the economic cycle, Duncan says it appears most property funds will continue to achieve inflation-beating income growth over 2010.
Catalyst Fund Managers’ February overview of SA’s listed property sector shows despite a slight pull back in share prices in January property stocks delivered a total return of 15.09% over the 12 months to end-January.
That compares to a total return of 33.16% for general shares (Alsi), 8.75% for cash and -1.67% for bonds over the same period.
Overall winner
In terms of individual property stock performance for 2009, Vukile Property Fund emerged as the overall winner, with a total return of 30.73%.
That was followed by Capital Property Fund (29.75%), Premium Properties (28.9%), Pangbourne Properties (26.92%) and Redefine Properties (24.15%).
The worst performer for 2009 was hotel niche fund Hospitality B, with a negative total return of -31.46%.
Its hotel occupancies and revenues were hit by a massive slump in local and overseas tourism.
Growthpoint Properties (1.66%) and Octodec Investments (9.53%) also ended 2009 in the bottom three.
Although equities beat listed property in the performance stakes over the short term, Catalyst figures show over five years listed property has made more money for investors than any other asset class.
The JSE’s listed property sector delivered a total annualised return of 21.6% between 2005 and 2009 compared to the Alsi’s 20.3% over the same period.
Property stocks also beat cash (9.3%) and bonds (7.1%) over five years.
Real estate funds were also a better bet than shares, cash and bonds over three years.
Steady income
Duncan says the fact SA’s listed property sector is still providing a growing cash flow (unlike bank deposits and bonds, where the income is fixed) is what makes the sector so attractive relative to other income-generating assets.
Leon Allison, property analyst at stockbroking firm Macquarie First South Securities, holds a similar view.
In fact, Allison has recently upgraded his buying recommendation for the listed property sector, suggesting investors should be overweight in bricks and mortar this year.
Although Allison doesn’t expect exciting returns from listed property over the next 12 months, he says the high cash flow component makes property stocks a more attractive bet than other asset classes in what could be an uncertain, volatile environment.
Allison expects average income growth of 6% for the sector as a whole over the next 12 months.
“Our upgrade to overweight isn’t based on a value argument but rather a defensive one: a near certain 9,5% cash yield looks attractive in a potentially volatile environment and the muted returns expected from other asset classes.’’
Allison says Macquarie expects a total return of 9% for general equities (Alsi) over the next 12 months, of which the income portion (dividend yield) will be just 3%.
By comparison, listed property is expected to deliver a total return of 11%, with almost 10% of that comprising a relatively certain income stream (distribution yield).
Although shares and listed property will therefore deliver similar nominal returns in 2010, Allison notes property offers higher risk-adjusted returns.
Rental escalations
He adds: “In a lower economic growth and higher inflation environment property’s inflation hedge characteristics – such as built-in annual rent escalations – will also come increasingly into play.’’
Nevertheless, Allison cautions vacancies, bad debts and arrears may well continue to rise gradually in many listed property portfolios over the coming months. However, he says the level of vacancies, bad debts and arrears are generally manageable.
“The office sector seems the weakest, particularly in certain nodes, where vacancies have reached or even breached 10%. We expect overall vacancies to have ended at around 6% in 2009 and we forecast those to rise and peak at just more than 7% by year-end 2010.’’
Allison says a further risk to the sector – indeed, to the whole economy – is sharply rising electricity tariffs and municipal rates.
Although those costs are mostly passed on to tenants their cost of occupation rises, constraining their ability and willingness to pay higher rents.
Key question for investors is what sub-sector of the commercial property market is likely to perform best over the next 12 to 18 months?
Where in the business cycle?
Phil Barttram, head of research at Old Mutual Investment Group Property Investments (Omigpi), says there’s no doubt offices, retail and industrial property respond differently in different stages of the economic cycle.
“Property returns generally tend to lag the economic cycle and we expect nothing different this time round.”
However, Barttram notes international and local examples have shown the retail sector tends to outperform other segments during a sustained growth recovery, while offices tend to outperform in a more benign environment.
In line with that, Omigpi says investors should be overweight quality retail over the medium term, followed by industrial property and then offices.
Barttram says Omigpi’s forecast indicates retail will remain under pressure through first half 2010, given a reticent consumer and what it believes will be a dogged oversupply of retail space.
“As such, while we prefer retail we expect to see a dislocation of returns between dominant and peripheral centres in the upcoming cycle," said Barttram.
"We believe the retail sector overhang will exaggerate the pressure on the non-dominant retail centres. Research has shown the December sales boom provides a defensive buffer against seasonal trading variances and it’s the tenants in the dominant (often larger) centres that really benefit from that buffer."
“Our contention is even with the Soccer World Cup boost, restricted access to debt, a delayed consumer recovery and less than exceptional year-end trading will make competition for disposable spend even more critical over 2010,” he said.
Barttram says a smaller spending pool, combined with a material increase in supply, will lead to a geared decline in the non-defensive malls, as tenants look to focus their exposure in high performing centres.
“That leads to a snowball effect of higher vacancies, negative rental reversions and an inferior shopping experience, which ultimately translates into fewer shoppers in peripheral centres.”
Barttram says industrial property returns have traditionally shown a high correlation to retail returns, particularly in an economic upswing.
Omigpi believes industrial landlords will see increased demand for existing space throughout second half 2010.
“As capacity utilisation improves and inventory restocking continues, so more of existing space will be taken up.”
Barttram said unlike retail and offices the industrial segment has the benefit of relatively short gestation periods for new buildings, which has enabled that sector to limit the extent of any supply overhang.
“However, detracting from industrial property returns will be the strong rand and its impact on exports. That may restrict expansion plans by the larger companies, which will lead to dampened growth prospects.”
No short-term fixes
As for the office market, Barttram says in the previous property cycle returns were severely affected by an oversupply, with vacancies eventually peaking upwards of 20% in the early 2000s.
“Fortunately, this time around available space was at record lows when the country went into recession.
While we expect high vacancies to have a negative impact we don’t expect a return to the extremes seen in 2001 and 2002.”
However, Barttram warns against speculative developments with a completion date of 2011 and 2012.
“Our research has shown the time taken to work through an oversupply – once property returns have bottomed – could be anywhere between one and three years. That period is very similar to the development period of a large office project and investors could find a vacancy peak at the exact time they’re bringing space to market.”
- Finweek
