Nedgroup Investments Property comment - Sep12 - Fund Manager Comment26 Oct 2012
South Africa's listed property sector recorded the first monthly decline in 2012 during September. Prices fell on average by 4.6%, but September sees the payment of a number of distributions, which boosted the return by 1.3%. Despite September's decline, listed property remains the best performing asset class in South Africa during 2012, having posted returns of 32.2% so far this year. September's price action was not unexpected after significant price gains in the largest listed property companies were recorded in the preceding four months, as foreign investors upped their exposure in the most liquid property counters. The Nedgroup Investments Property Fund has significantly less exposure to these overvalued, larger listed property companies and as a result, outperformed the market by 142 basis points in the September decline.
The forward yield on the sector has now crept back up to 7.1% as a result of the price weakness during September, as well as the larger income base created at the conclusion of the June reporting period. The forward yield on the listed property sector is now below the yield of longer maturity government bonds that have been rising as the rand has weakened and after the Moody's debt downgrade. The result is that the sector may be under further pressure in October to address the perceived relative value in the bond market, although in the longer term, South Africa's listed property sector is expected to deliver significantly better returns than the bond market.
The current forward yield on the Nedgroup Investments Property Fund is 7.1% (in line with the sector), while distributions are expected to grow by approximately 7.5% per annum over the next three years. With global interest rates expected to remain lower for longer, the initial yield and income growth prospects look good in the current investment climate.