The property sector, South Africa’s best performing asset class over the past 20-odd years, hit a wobble in May retreating, along with equities, from highs that saw the property index fall roughly 10% in a matter of weeks.
Source: I-Net Bridge 30 June 2015
What does this mean? Is this the end of the listed property bull run? Have macro-factors turned against property? Or are there now buying opportunities for the brave?
Moneyweb spoke to a number of property fund managers to get their take on what is happening in the property market.
“This correction was not unexpected, we had been warning that the sector valuations were looking steamy the last few months,” says Mohamed Kalla, portfolio manager at property specialists, Sesfikile Capital.
Earlier this year bond yields started to move up from previously low levels, but property kept on going – this should have been a warning sign. “This may have had something to do with the inclusion of companies like Hyprop, Resilient, Attaq in global indices,” says Keillen Ndlovu Head: Listed Property Funds, Stanlib. “This attracted index trackers into the market between February and May, and helped drive demand – even in an environment that was starting to look volatile.”
Volatility, they say, should be expected. Some investors have this notion that listed property is not volatile, says Evan Robins manager of the Old Mutual SA Quoted Property Fund. While SA Reits offer an attractive investment proposition, in the short term they are inherently volatile. “The primary driver in this latest sell-off was not property issues, but the macro-economically determined increase in bond yields, off which property is valued. Property benefitted when these bond yields fell – at one point to extreme levels, but with bond yields now rising, investors are getting nervous.
Does that mean its time to get out of property?
“A 20% return is not the norm. Past returns were a result of all the stars being aligned. These included positive property fundamentals and supportive capital markets,” says Paul Duncan, investment manager with specialist real estate investor Catalyst. “The stars have come out of alignment and we may see further correction, but it does not mean the sector will not do well. I would say investors could expect returns of 10% to 12% a year on a five year view. But investors need to be comfortable with short term share price volatility.”
Has the correction generated buying opportunities?
Prices are coming in at healthier levels, says Robins, but they are still not cheap. In the short term consensus is that bond yields could rise further, settling at 8.5% to 9% at year-end, which will have a negative impact on capital returns for property.
The market could still pull back another 5% to 10% as a function of bond yields rising, but now is not the time to panic, says Kalla. Instead it is time to be rational and strategic in your investment approach. “The lower prices allow investors to pick up higher yields; there are good quality stocks offering 8% to 9% distribution yields that are still growing ahead of inflation,” he says.
In South Africa property fundamentals are tough and distribution growth is expected to slow, thus SA- based property companies like Vukile, Emira, SA Corporate and Redefine pulled back harder in the correction.
That said, difficult local conditions are encouraging investors to look at companies with offshore investments.