Nedgroup Investments Property comment - Sep10 - Fund Manager Comment08 Nov 2010
At the end of September, the fund declared its maiden distribution of 2.17 cents per unit for the A class and 2.22 cents per unit for the A1 class, both of which were in line with expectations. The distribution at the end of December will be lower as a result of fewer companies in the listed property sector declaring and paying distributions in the second and final quarters of the calendar year.
South Africa's listed property sector returned 3.5% during September after the Monetary Policy Committee of the South African Reserve Bank lowered official interest rates by 0.5% at their September meeting. The sector also benefited from the fact that bond yields continued declining during the month on the back of large foreign investment. There was very little company-specificnews to influence prices, although a number of new listings have been earmarked for the new year. This is likely to absorb a significant portion of the investor demand currently driving prices higher and may result in significantly less capital appreciation over the next 12 months (so far this year, prices have risen by 17.2%). Currently, investor demand is driven by the fact that listed property is the highest yielding asset class in South Africa and that the sector is able to provide investors with an inflation-hedged income stream over extended periods.
The current forward yield on the sector is 8.1%, almost 20 basis points above the yield on 10-year government bonds. Distributions are forecast to grow by 7.5% per annum over the next three years, resulting in an expected total return of 15% per annum. Earnings visibility within the listed property sector is high, given the long-term contractual nature of the rental income streams. The most significant risk to our forecasts would be a substantial slowdown in economic growth, resulting in further tenant failures, job losses and "downsizing", all of which would negatively impact occupancy levels and market rentals.