Share prices moved up marginally on the back of strong distribution performance and steady inflation figures. This was to be expected, given the positive local economic environment. The current gap between bond yields and property loan stock yields, in particular, suggests that property still offers good value as property funds have all reported growth in distributions.
Inflation data released for September showed CPiX steady at 3.7%. While interest rates were left unchanged at the MPC meeting during the month, speculation is still strong that a further cut could occur in December 2004, despite oil prices increasing. More than 50% of the sector is invested in shopping centres and given the strong local retail market, such a potential rate cut bodes well for the retail landlords. Those counters that have the capacity for more gearing, e.g. the ungeared PUTs such as Grayprop, Sycom & Martprop, will also benefit from the lower interest rate environment. However, it seems this has already been priced in.
Current property fundamentals continue to improve. SAPOA and Rode research reports continue to confirm that the commercial property market is recovering. Retail is ahead of the curve with industrial property following closely. Both property types benefit from a strong consumer, while offices are more aligned to Corporate SA growth prospects. Therefore, while the current office market is still depressed, positive signs are emerging. Importantly, supply is slowing and with the large number of office-to-residential conversions occurring in the CBDs, further upside is expected within 12 months. Rentals continue to improve across the board. The likelihood of further earnings and distribution growth remains very strong.
While the SA Listed Property sector share prices increased marginally during the month, further upside is still expected through earnings growth and stronger yields. This is being supported by good inflation data, a strong rand, 22-year low interest rates, a strong retail sector and improving commercial property fundamentals. SA Listed Property offers long-term value as the economy moves to a structurally lower inflation environment over the next three years.

Share prices responded positively to the lower interest rate outlook during the quarter. This was to be expected given the positive local economic environment. The current gap between bond yields and property yields suggests that property still offers good value, particularly given that property funds have all reported distribution growth and property fundamentals are improving.
CPIX continued its downward spiral, settling at 3.7%. This resulted in market sentiment shifting towards predictions of a further interest rate reduction in October 2004 - despite oil price increases - which is very good news for the sector. More than 50% of the sector is invested in shopping centres and any further drop in interest rates will be positive for retail landlords. In addition, those counters that have the capacity for more gearing, e.g. the PUTs such as Grayprop, Sycom and Martprop, will also benefit from the lower interest rate environment.
SAPOA and Rode research reports confirm that the commercial property market is recovering. Retail property is ahead of the curve with industrial property following closely. Both property types benefit from a strong consumer, while the office sector is more aligned to corporate SA growth prospects. While the current office market is still depressed, positive signs are emerging. Importantly, supply is slowing and, with the large number of office-to-residential conversions occurring in the CBDs, prospects appear good for a recovery within the next 24 months. The likelihood of further earnings and distribution growth remains very strong.

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While the SA listed property sector share prices increased during the quarter, further upside is still expected through earnings growth and stronger yields. This is being supported by good inflation data, 22-year low interest rates, a strong retail sector and improving commercial property fundamentals. SA Listed Property offers long term value as the economy moves to a structurally lower inflation environment over the next three years.

The outlook for listed property remains positive and this should translate itself into continued distribution growth over the short-term. Investing in the SA Listed Property sector carries long-term capital protection benefits, and investors should give serious consideration to including it in their portfolio to ensure that it is well diversified. It is important to note that investing in the sector via a unit trust or directly through the JSE represents a highly liquid investment unlike owning the property directly. The work of collecting the rent from tenants and the general maintenance of the building is already taken care of by competent property professionals.
While share prices have firmed considerably in the past year, time in the market is the key investment objective not timing the market. SA Listed Property is a long-term investment and investors relying on the interest income should continue to enjoy this benefit. It should also be noted that historic returns are not necessarily an indicator of future returns.

Share prices ended marginally up for the second quarter, despite softer bond yields. The quarter was rather mixed with the sector drifting sideways on the back of softer bond yields, but better than expected inflation data. SA listed property yields and share prices responded slowly to the data released, with investors taking a 'wait and see' approach. The sector now offers relatively good value.
Current property fundamentals continue to improve. SAPIX/IPD and Rode reports confirmed that the commercial property market is recovering. Evidence exists that rentals are marginally up while vacancies have dropped. The supply of office buildings has also slowed, with developers focusing on the retail and residential market. This is positive for the sector as it adds to the demand for existing space. The likelihood of further earnings and distribution growth remains strong.
In summary, while the property sector share prices were marginally up for the second quarter, further upside is expected through earnings growth and stronger yields going forward. This is being supported by good inflation data, 10-year low interest rates, a strong retail sector and stronger commercial property fundamentals. Due to the potential increase of inflation in the months ahead, a small nominal interest rate rise in the first half of 2005 could put a dampener on returns in the short term. This is expected to be a temporary situation and, with many of the counters having fixed large portions of their debt exposure, the negative impact should be limited. SA listed property offers long term capital growth potential as the economy moves to a structurally lower inflation environment over the next three years.

The SA Listed Property sector has performed admirably over the past calendar year. Two dynamics seem to be at play in the current environment - pulling in opposite directions. On the positive side, the property fundamentals are strong and interest rates at 10-year lows should translate into further earnings and distribution growth. However, on the negative side, the expected rise in inflation could have a knock-on effect and result in an increase in interest rates.

The March 2004 inflation data surprised the market with a marginal drop in inflation. This was in-line with the announcement by the Reserve Bank that interest rates would remain the same. Interest rates are still at 10-year lows and this continues to be positive for the sector as the gearing effect of debt contributes to earnings and distribution growth.

The Direct Property fundamentals are strong. SAPIX/IPD released the 2003 direct property results and the figures confirmed that the commercial property market has recovered. Rentals are up, while vacancies have dropped. The supply of office buildings has also slowed with developers focusing on the retail and residential market. This is very positive for the sector as it reduces the relative supply of space. The likelihood of further earnings and distribution growth is strong, particularly as lease escalations remain above inflation.

With direct property capitalisation rates well above listed property yields, there remains a strong incentive for institutions, developers and listed companies to list more property through acquisitions. As a result, further expansion of the listed portfolios has taken place. Demand and liquidity continue to improve, which bodes well for the sector going forward.

To summarise, further upside is expected through earnings growth, which is being supported by 10-year low interest rates, a strong retail sector and stronger property fundamentals. Due to the potential increase of inflation in the months ahead, a related small interest rate rise towards the end of 2004 could put a dampener on returns in the short term. This is expected to be a temporary situation as many of the PLS’s have fixed large portions of their debt exposure. The sector therefore continues to be an attractive alternative to Bonds in this low inflation environment.

The two interest rate cuts of 150bps in October and a further 50 bps in December 2003 boosted returns in the sector
The continued reduction of inflation and the strong rand boosted returns as the sector re-rated positively along with bonds. The current low interest rate environment is good for the sector because it should translate into more demand for space from tenants and higher distribution growth.

The sector now seems fully priced relative to NAV
Direct property is currently less expensive than listed property shares. This means that it is cheaper to purchase a building directly rather than purchasing listed property shares. This phenomenon incentivises investors to convert directly held property into listed paper. As a result, it is expected that the sector will show further NAV growth.

The sector continues to expand aggressively through new listings and acquisitions
Various new listings and major acquisitions were announced during the quarter. This situation is likely to continue in the short term until listed yields and capitalisation rates reach equilibrium.

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The SA listed property sector has performed admirably over the past year. It now appears to be fully priced based on current economics. However, further upside is still expected through distribution growth, which is being supported by strong domestic demand and low interest rates. However, early warning signals of bond yield weakness could put a dampener on returns in the medium term.