SA listed property continues to scale new highs

On the back of strong earnings and improving fundamentals.

South Africa’s listed property sector continues to scale new highs boding well for value chasing investors, but industry players warn that expectations of the sector’s momentum must be realistic.

After the surprise 50 basis points interest rate hike at the beginning of last year which sent the property sector crashing by 7% – the sector has seemingly turned a new leaf.

The listed property sector has had a strong run and with this the good times have followed for investors.

The listed property sector’s performance for 2014 ranked among the best performing JSE sector, with the South African Listed Property Index (Sapy) amassing total returns of 26.6% for 2014.

Portfolio manager of the Investec Property Equity Fund, Neil Stuart-Findlay says that “Ironically, part of the reason for the sector’s strong rally in 2014 was due to economic growth faltering in most developed markets.

“That weaker growth resulted in lowered forecasts for both inflation and interest rates,” Stuart-Findlay told Moneyweb.

The sector has since ballooned, as the Sapy index delivered total returns of 44.3% (including dividends) for the 12 months to February 28, 2015.

And this has been followed up by strong numbers in January and February, when the sector recorded total returns of 7.4% and 3.2% respectively.

As global sentiment turned negative, so followed lower bond yields which bode well for property stocks in their share price performance and returns to investors.

“On the local front, there’s no doubt that the economic backdrop is quite challenging. Notwithstanding that, the underlying direct property market has remained relatively resilient in the circumstances,” he says.

The property sector has firmly entrenched itself as a separate asset class with returns trumping that of bonds, equities and cash (See graph below).

listed-property-500x272

Source: I-Net Bridge data to 11 March 2015

Head of listed property funds at Stanlib Keillen Ndlovu says the performance sector is also driven by “better than expected results” recently reported by property counters.

Companies such as Growthpoint Properties, Emira Property Fund, Synergy Income Fund, Hyprop Investments (Hyprop) are some of the companies which have declared results for the six months to December 2014.

Offshore funds or global Real Estate Investment Trusts (REITs) as they are commonly known such as Rockcastle Global Real Estate Company and New Europe Property Investments also reported positive earnings in dollars and euros.

Ndlovu says the sector has seen increased demand from retail and institutional investors, including new investors – of which some are based offshore. This has been made possible by the international exposure awarded to companies such as Hyprop, Acucap Properties, Redefine Properties, Resilient Property Income Fund and Attacq, with their inclusion in the FTSE World Equity Index.

The listed property sector is trading at a forward yield of 6.5%, says Ndlovu.

But analysts note that the sector’s momentum might cool off, with some volatility created in the short term by the uncertainty around the pace of interest rate hikes in the US.  The Sapy reached 670 points last week Thursday but has since moderated to 645 points (March 12).

“However, over the medium term we continue to see the potential for investors to enjoy inflation beating returns from the asset class, aided by the sector’s underlying yield and solid distribution growth, which is expected to exceed 8% this year,” says Stuart-Findlay.

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