Nedgroup Investments Property comment - Sep11 - Fund Manager Comment27 Oct 2011
South Africa’s listed property sector followed both the equity and bond markets lower in September. Investors have become increasingly concerned that Europe’s debt crisis will result in a prolonged period of lacklustre economic growth, which would in turn lead to lower growth in market rentals. The forward yield on the sector has increased to 8.5%, 20 basis points above the yield on a 10-year government bond. Given the contractual nature of the leases in place and the built-in escalations, earnings visibility in the sector is high, a rarity in the tumultuous financial markets of today. However, distribution growth rates have been scaled back marginally to reflect the lower economic growth expected over the next two to three years. Distributions are now forecast to grow by 6.8% in the next year and by 5.8% in the year thereafter. The sector is, therefore, likely to continue to produce an inflation-hedged income stream for investors in the medium term, although inflation expectations may increase if the rand’s recent weakness is sustained and leads to an increase in the price of imported goods.
During September, Hyprop concluded the purchase of a portfolio of high quality retail properties from Attfund, resulting in the issue of a further 92 million Hyprop linked units. Hyprop now joins Growthpoint, Redefine and Capital in having a market capitalisation in excess of R10 billion. It also increases the sector’s exposure to retail properties where demand for space from anchor tenants like Pick ‘n Pay, Checkers and Woolworths remains high.
The forward yield on the Nedgroup Investments Property Fund is 8.0%, with distributions forecast to grow by 8.1% in the next year and by 6.8% in the year thereafter.
Nedgroup Investments Property comment - Jun11 - Fund Manager Comment19 Aug 2011
South Africa’s listed property sector gained a further 1.2% in June, resulting in a return of 5.0% for the second quarter of 2011.
Both Acucap and Sycom reported results at the beginning of the month which highlighted the ongoing recovery in the retail sector and a further deterioration in the office market. South Africa’s office property market has seen a substantial reduction in demand from tenants and despite the fact that very little new space has come on stream in the past 12 months, there is continued downward pressure on rentals across most major markets. The situation is unlikely to be reversed in the short term as a number of new projects are being considered, which may lead to an increase in new office space over the next three years, placing further pressure on office market rentals.
The steady recovery in retail sales bodes well for South Africa’s listed property sector, which has historically had a higher weighting to retail properties than to both office and industrial combined. The corporate activity currently taking place in the sector, as well as the expected listing of Old Mutual’s mainly retail portfolio towards the end of the year, will further increase the sector’s weighting to retail and should result in higher distribution growth in the years ahead.
The portfolio has recently participated in the private placement of New Europe Property Investments plc (NEPI) shares. This has temporarily reduced the forward yield on the portfolio to 7.9% (before fees) as well as providing the portfolio with some offshore diversification. The NEPI shares were acquired at a discount to the current share price of more than 12%.
Nedgroup Investments Property comment - Mar11 - Fund Manager Comment16 May 2011
Having sustained losses is both January and February, the South African listed property sector bounced back in March, gaining 3.4% and outperformed both the equity and bond markets. There was little new news to prompt the recovery, suggesting the sector may have been oversold after sustaining losses in excess of 5% in the first two months of the year. Long bond yields, often a driver of short-term performance in the listed property sector, ended the month at similar levels to February. As a result of the recent price action, the historic yield on the sector has declined to 8.0%, from February’s level of 8.2%, while the forward yield (ie the yield investors will get over the next 12 months if they made an investment today) has also declined by 0.2% to 8.5%, in line with the yield on 10-year government bonds.
Distributions are forecast to grow in excess of 6% in 2011 and by just over 7% in 2012. This should be enough growth to preserve the purchasing power of the income stream (ie provide the investor with protection against the impact of inflation on his/her investments). There are obviously risks to the distribution outlook, most notably that retail sales growth disappoints, resulting in lower revenues for retailers and lower rentals for landlords. The listed property sector in South Africa is dominated by retail properties, with the weighting towards retail properties set to increase even further when Hyprop completes the acquisition of Attfund’s retail portfolio, Growthpoint completes the acquisition of a 50% undivided share of the V&A Waterfront and Old Mutual lists their predominantly retail portfolio later in the year.
A growing income stream is an important benefit often overlooked by investors when considering where to invest their savings to generate a desirable level of income. Traditionally, investors have used bonds or cash to provide the majority of the income they require and although both these asset classes can provide an acceptable level of income at the outset, without growth in that income stream, investors find themselves unable to maintain their standard of living as inflation means everything goes up in price each year. This often leads to them dipping into their capital to supplement the income they are receiving. A lower capital base means less income in the future, resulting in an ever increasing use of capital to maintain alifestyle until the client has eventually exhausted their entire savings pool. Listed property not only provides a very high level of income at the outset, but is able to grow that income at or above inflation. Investors are therefore never required to dipinto their capital to maintain their lifestyle (and over time, that capital base will grow in line with the growth in income).
Nedgroup Investments Property comment - Dec10 - Fund Manager Comment10 Feb 2011
2010 in review
South Africa's listed property sector returned 29.6% in 2010, comfortably exceeding the returns generated by the FTSE/JSE All Share Index (19.0%) and the BEASSA All Bond Index (15.0%). The sector was supported by lower official interest rates (and lower bond yields) as well as strong distribution growth of 7% year-on-year.
Unlike many of the world's commercial property markets, South Africa experienced very limited new supply during the boom years and was, therefore, in far better shape to weather an economic downturn. South Africa's listed property companies are also not as heavily geared as their global counterparts, which provided investors with further protection during the recession.
As South Africa's economy moved out of recession in 2010 and the pace of economic activity increased (albeit modestly), vacancy rates and market rentals stabilised. Against this backdrop, the sector was able to grow distributions in excess of inflation for the sixth consecutive year.
Outlook for 2011 and beyond
Interest rates are forecast to start rising again towards the end of 2011 or the beginning of 2012 and this may well see the yield on the sector rise modestly (resulting in modest capital losses). However, interest rates will only start rising when consumer inflation or economic growth has accelerated substantially, in both cases good news for the property market as it would result in higher rental levels and distribution growth from the listed property sector.
The current forward yield on the sector is 8%, which is in line with longer-dated government bond yields. Distributions are anticipated to grow at between 6% and 8% per annum over the next three to five years. Assuming no rerating of the sector, that should produce total returns of between 14% and 16% per annum. The sector therefore appears poised to deliver double digit returns to investors in 2011 and beyond, although not of the magnitude experienced in 2010.