Listed property faces a tough time in 2014

Image courtesy stock.xchnge (PocketAces)

The total return of the local listed property sector has been 5.3% in the year to date, a far cry from the double-digit environment that investors were accustomed to over the past decade.

However, analysts still believe the sector offers attractive, inflation-beating, long-term returns, with some short-term volatility.

Anton de Goede, property analyst at Coronation Fund Managers, says 2013 has been a “year of two halves”.

In the period leading up to May, the sector flourished with total returns of up to 20%. However, following the spike in bond yields and subsequently property yields, returns have reversed into negative territory and have fallen about 14% from these highs.

De Goede says over the past ten years, the local listed property sector has really benefitted from fiscal discipline, inflation targeting and the subsequent rerating in the local bond market.

But prospects changed in May when it became evident that the Fed would start tapering its quantitative easing program.

De Goede says bond yields moved up from levels close to 6% to 8% while the forward yield on property spiked from a low of 6.1% to 7.7% at present.

Bond yields?

Research conducted by Towers Watson, a UK-based company that specialises in risk and capital management, found that little evidence exists to support the view that rising bond yields necessarily translates into declining property returns.

Erwin Rode, property valuer and economist at Rode & Associates, says the correlation between long bond yields and listed property yields is strange, since property’s income stream grows with about 6% on average while that of bonds is fixed.

De Goede explains that the derating in the property market following the spike in bond yields is related to the sector’s perceived yield prospects.

Next year

De Goede says while the listed property sector is expected to outperform inflation in 2014, volatility is likely to persist as a result of an expectation that interest rates could rise.

Rode says it is reasonable to expect a total return of 10% in 2014.

Leon Allison, property analyst at Macquarie, says he expects a 10% return for the listed property sector next year, of which 7.6% is predictable income yield at lower than market risk.

This is based on the current 10-year bond yield of 8.16%.

He says the listed property sector is likely to deliver average distribution growth of 8% over the same period.

Listings

De Goede expects that fewer property companies will list next year as interest rates increase. It is likely that some of the smaller listed companies will consolidate, Rode says.

Long-term

De Goede says through the cycle investors can still expect a 10% to 15% total return per annum, based on an income yield of between 7% and 9% and growth on that income yield. However, a 10% total return, given 6% inflation, is still a reasonable return.

Allison says over the next three to five year period, the sector could deliver double-digit returns of between 12% and 15%.




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