SA property index still on a high

Investors into South Africa’s property market have been coining it, as the sector continues to outperform, despite the trading environment being increasingly difficult.

The South African Listed Property Index (Sapy) has been the star performer, with total returns to date reaching 23%, underpinned by the strong bond performance.

From August to October, the index has performed significantly, recording a total return of 12.4%, outperforming general equities in the FTSE/JSE All share (-2%), says listed property manager for Old Mutual Investment Group’s MacroSolutions boutique Evan Robins.

“This was largely because the bond market was strong during the period, with yields falling. Properties relating to bonds changed little over this period despite good property results,” says Robins.

While Sesfikile Capital supports this view, adding that the compression in bond yields continued to provide support for property prices in October. The SA 10-year bond compressed 47 basis points from 8.22% to 7.75%. According to its estimates, Sesfikile Capital says the Sapy delivered a total return of 6.8% for October.

However this momentum is expected to slow down, given the tepid macroeconomic challenges and property specific fundamentals. South Africa’s slow economic growth which is pegged at 1.4% for 2014 and consumers being under pressure are set to cool the local property market.

“These headwinds will need to soften if this performance is to continue, especially with regard to the consumer,” he says.

Overall, the outlook for 2015 is still challenging, as interest rates are also set to dampen the property sector. The South African Reserve Bank (Sarb) has indicated that rising interest rates are part of its monetary policy.

Old Mutual chief economist Rian le Roux says fiscal policy will be tightened, but the decline in oil prices and improved inflation outlook reduces the risk of the central bank tightening policy aggressively.

Given this, Le Roux expects that Sarb might increase interest rates by May next year by 25 basis points.

JSE counters lift Sapy

The Sapy was also boosted by strong financial results by listed property counters – specifically growth in rentals and distribution growth.

“Many companies released results during the period and these were as good as or better than expectations, with double-digit distribution per unit growth and no substantial company growing dividends by less than a margin above inflation,” says Robins.

Some of the property counters that declared distribution growth are: Hyprop Investment (8%), Emira Property Fund (8.3%), Growthpoint Properties (8%) and Arrowhead Properties (18%).

Guidance in dividend growth for the listed property sector is expected to slow “to around 9%”.

Despite the sparkle of the property sector, it still has real risks. Robins says risk in the listed property sector has been underestimated and unappreciated. “Property prices can be more volatile than many appreciate. From a long-term perspective the return outlook remains strong, but the journey could be bumpy,” he adds.

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