The sector delivered returns of over 20% per annum for over a decade. But over the last year, the FTSE/JSE SA Listed Property Index (SAPY) is basically flat and the majority of SA real estate unit trusts have delivered negative returns.
In May last year the sector began to suffer the fallout from the US Fed’s talk about tapering its quantitative easing programme. That had an immediate impact on all yield instruments, including our local listed property counters.
In the year to January 31 2014, SA listed property was down 0.32%, compared with equities (All share index) up 14.86%, cash (Short term fixed interest index) up 5.19%, and bonds (All bond index) down 2.69%, according to Catalyst Fund Managers, RMB Credit Research.
So is there still a strong case for investing in listed property unit trusts?
“We’ve actually continued to see pretty good earnings growth out of the sector,” says Investec Property Equity Fund manager, Neil Stuart-Findlay. “That’s even led us to upgrade our growth forecast for this year and 2015 to in excess of 8%.
Anton de Goede, the manager of the Coronation Property Equity Fund, concurs.
“… the underlying performance of the counters remains solid, and some are still delivering double digit growth.”
In line with rising bond yields, the forward yields of JSE-listed real estate counters have also jumped over the last nine months. From an average of around 6% at the market’s peak, they’re now over 8%.
“The outlook for distribution growth in 2014 remains reasonable and the sector is likely to deliver above inflationary type growth in income distributions,” says Zayd Sulaiman of Catalyst Fund Managers.
“Most listed property companies are largely hedged against short term interest rate hikes so the impact on short term earnings is likely to be minimised and smoothed over time.”
The fundamentals – and listed property’s ability to deliver sustainable income – are still there, but investors will probably have to adjust to a different kind of reality regarding the performance of real estate funds.
“Going forward we are likely to continue to see volatility given the uncertainty around global monetary policy,” Investec’s Stuart-Findlay says. “But relative to other fixed income asset classes, listed property has the advantage of providing income growth, which will aid investors over time.”
Warning against expectations of 20% to 30%, De Goede says long term returns will be closer to 10% to 15% through the cycle from the property sector.
Cataly’s Sulaiman: “We remain cautious over the short term. But the long term now looks relatively attractive with the entry point now pricing in a more normalised, long term capital market and risk free rate environment.”
Stuart-Findlay agrees. “…the reality is that the sector is still underpinned by a very healthy yield and distribution growth. Especially considering the adjustment to yields we have seen over the last nine months, listed property can continue to achieve real returns over the medium to long term.”
Over time, it will be the dependability of that yield that keeps the sector attractive.
“The focus of investors should be on the income component of property rather than capital return,” De Goede says. “Capital return is just a bonus.