Listed property still the top performing asset class

After two consecutive negative total returns in May and June of 5.93% and 0.36% respectively, which signalled stumbles in the sector’s unprecedented run, the FTSE/JSE South African Property Index is back in positive territory.

Latest figures from Cape-based Catalyst Fund Managers show that the index delivered 0.83% total returns for September and 13.26% so far this year.

Listed property investors have been coining it, as the sector for the 12 months to September has comfortably outperformed bonds, cash and equities.

In the period, the sector notched up a total return of 25.82%, followed by bonds (7.04%), cash (6.38%), and equities (4.79%).  It seems like the rebound of the sector has been largely underpinned by stronger bond yields, as listed property and bond yields generally trend together over the long term.

Other factors behind the sector’s unprecedented run is due to better than expected earnings by property counters and a flurry of listings into the JSE’s more than R400 billion real estate sector.

So far, six property companies have listed this year; Arrowhead Properties’ pure residential-focused Indluplace Properties, UK-focused Capital & Regional, New Frontier Properties, Lodestone Properties, UK-focused hotel fund International Hotel Group and property developer Balwin Properties.

The listing of storage fund Stor-Age is still pending for November.

The top performing individual property stocks for the past nine months include shopping centre owner Fortress Income Fund B-unit, clocking up total returns of 86.30%. Fortress B-unit was the best performing property stock in 2014 delivering total returns of 100%. It was followed by hotel owner Hospitality B-unit (70.23%) and sister fund to Fortress, Resilient Property Income Fund (41.39%).

Offshore stocks

Offshore property stocks have also put forth a strong performance. In recent years, offshore funds have performed well relative to SA-focused funds. Both Germany-focused Sirius Real Estate Limited and UK-focused Capital & Counties Properties have delivered total returns of 37.9%. These returns are in hard currency.

Offshore exposure now makes over 25% of the SA-listed property index income, while ten years ago the sector had no offshore exposure, says Stanlib’s head of listed property funds Keillen Ndlovu. He expects offshore exposure to grow above 30% in the next 12 months, as the appetite among investors grows as the weakness of the rand makes offshore investments look more attractive.

Sesfikile Capital in a research note says the cost of debt funding in most offshore markets is lower than acquisition yields, which creates an initial accretion in earnings.

“Our concern is that in the respective offshore regions, inflation as well as core income growth is lower than SA in nominal terms and could become a drag on earnings in the medium to long term,” it says.

Market watchers have rated SA’s listed property as expensive, given that the sector is trading at a forward yield of 7%, whereas bonds are trading at 8%.

While global property is trading at a yield of 4%, bonds are trading at 2%. “In a global context, SA is not looking attractive at this point,” says Sesfikile Capital director Kundayi Munzara.

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