Nedgroup Investments Property comment - Jun13 - Fund Manager Comment17 Sep 2013
South Africa’s listed property sector advanced 4.4% in June on the back of some quarter-end window dressing in the largest listed property companies. On the final day of trading in June, Growthpoint Properties advanced 5.2%, Hyprop 5.8% and Redefine 4.9%. Due to underweight positions in these larger listed property companies, the Nedgroup Investments Property Fund registered a return of 0.4% in June. Over the past year, the Fund has returned 25.5% versus 24.0% for the SA listed property sector.
Listed property has spent the better part of the last two months firmly on the back foot as global bond yields have risen in response to comments from US Federal Reserve Chairman, Ben Bernanke about a possible end to quantitative easing in the United States. At the same time, investors have become increasingly concerned about the prospects for emerging markets, causing the Rand to weaken against the US dollar. The combination of higher global bond yields and a weaker Rand has seen a spike in South African bond yields, as well as a spike in listed property yields (facilitated through a drop in prices).
Although the Nedgroup Investments Property Fund did re-initiate a position in Growthpoint after the price declined more than 20%, there is still significantly more value in the smaller listed property companies that are trading on forward yields in excess of the yield on longer-dated government bonds. By contrast, most of the larger listed property companies are trading on forward yields more than 200 basis points below the yield on longer-dated government bonds. For that reason, the Fund continues to maintain significant underweight positions in the largest listed property companies, a strategy that has not only delivered superior returns for investors- , but done so with significantly less price volatility.
The Fund has declared a distribution of 1.7c per A unit, which was below the 2.1c forecast at the beginning of the year. The reason for the miss was both Acucap Properties and Sycom Property Fund have delayed the payment of their distributions to the third quarter. The Fund would have met its distribution target had those distributions been received in the second quarter. Due to the continued repositioning of the portfolio and opportunities to buy listed property securities at significantly higher yields, distributions for 2013 as a whole are now forecast at 9.0c, an increase of 26% over the distributions declared in 2012. Furthermore, distributions are now forecast to increase by more than 13% in 2014 and by more than 9.5% in 2015.
Nedgroup Investments Property comment - Dec12 - Fund Manager Comment30 May 2013
During 2012, the Nedgroup Investments Property Fund returned 35.6% on the back of a strong re-rating in South Africa’s listed property sector, after the South African Reserve Bank cut official interest rates further during the year. Since the Fund was launched in 2010, investors have enjoyed cumulative returns of 65%.
The Fund continues to maintain underweight positions in the larger, more liquid listed property companies that are trading on yields substantially below the balance of the sector and that are likely to lag in terms of both income produced and expected capital appreciation over time. These underweight positions are only possible because of the Fund’s relatively small size and because the Fund will be closed when its net asset value approaches 1% of the market capitalisation of South Africa’s listed property sector (in rand terms this would be approximately R2 billion based on the current size of the sector).
The Fund has continued to take advantage of private placements offered at discounts to prevailing market prices to enhance returns for investors. This source of excess return is expected to contribute significantly in 2013, as a number of the smaller listed property companies acquire portfolios to achieve critical mass.
The Fund is unlikely to repeat the stellar returns achieved in 2012, but should nevertheless, continue to offer investors an above-average income yield, inflation-hedged income growth and capital appreciation in the medium to long term.
The current forward yield on the Fund is 7.1% (versus 6.7% for the sector as a whole).
Nedgroup Investments Property comment - Mar13 - Fund Manager Comment30 May 2013
During March, the Nedgroup Investments Property Fund gained a further 3.5% and is now up 8.4% in 2013. Listed property has been the top performing asset class in South Africa since the start of the year, as investors seek out the higher income yields on offer in South Africa's property stocks. The first quarter reporting season was generally upbeat with most companies exceeding analyst expectations and painting a more optimistic 2013 and 2014. Distribution growth is being supported by lower borrowing costs, a moderate decline in vacancies and additional value created through property developments, re-developments, acquisitions and disposals.
Distribution growth for the sector as a whole appears to have bottomed at just under 6% in the fourth quarter of 2012, and is expected to accelerate towards 8% by the end of 2014. Current forecasts are based on a moderate increase in economic activity and a relatively stable interest rate environment throughout 2013 and 2014, which appears likely. For economic activity in South Africa to increase moderately, global economic growth will need to accelerate from current levels. While the US appears on the road to recovery, the situation in Europe appears to be deteriorating. This may lead to lower economic growth in South Africa, which would place pressure on market rentals and could also lead to an increase in vacancies, particularly in the office market.
The introduction of Real Estate Investment Trust (REIT) legislation in South Africa has heightened the sector's profile and foreign investor interest. Although the legislation doesn't change the manner in which the companies will operate, it does create certainty around the tax status of South Africa's listed property companies and will lead to the inclusion of many of the larger, more liquid companies in global REIT indices.
As a result of the increase in prices, the forward yield on South Africa's listed property sector has fallen to just 6.4%, which is 0.5% below the yield on a 10-year government bond. This is pricing in too much good news and investors are likely to be disappointed over the next 12 to 24 months. However, the low yield for the sector doesn't tell the whole story. There are still a number of listed property companies trading on extremely attractive yields with good medium-term growth prospects. As a result, the forward yield on the Nedgroup Investments Property Fund is 7.1%, with distributions expected to grow in excess of 9% per annum over the next three years.