Property share prices continue to gain on the back of excellent distribution results. Share prices rose more than 12% for the quarter. The prospect of further growth in distributions remains strong and this will be positive for the sector going forward because it will provide strong resilience to potentially rising bond yields. Many companies with interest rate fixes are unwinding these for more beneficial rates. This benefit falls straight to the bottom line.

Inflation was higher than expected, with consumer price inflation excluding mortgages at 4.8% in August 2005 and producer price inflation at 4.2%. Inflation ticked up during the quarter due to higher oil prices. However, the outlook for interest rates remains flat, which is positive for property income statements and yields, but the jump in producer inflation in August is a concern.

Current property fundamentals continue to improve. Reports from the market continue to confirm that the commercial property market is responding well to current fundamentals. The industrial and retail property sectors, in particular, have benefited the most so far, as both property types benefit from a strong consumer and low interest rates. Confidence among listed companies and managing agents in the local office sector has also increased significantly, with players being more positive on the outlook for offices. The likelihood of further sector earnings and distribution growth remains strong.

The SA listed property sector's strong earnings growth is expected to continue. The property cycle remains positive as a result of relatively low inflation, 24-year low interest rates, a strong retail supply chain and improving demand for space. However, much of this good news has already been priced into share prices, so the likelihood of strong capital gains similar to 2004 appears unlikely, particularly given a potential rise in bond yields.

The continued re-rating relative to bonds remains a good possibility given the strong property fundamentals. Property is an excellent diversifier and should outperform bonds and cash in the medium term.

Old Mutual SA Quoted Property (OMP) manager Colin Young is upbeat on prospects, noting that lower financing costs will result in "benefits falling straight to the bottom line of listed property companies". He says this will help endow the sector with "strong resilience" to any rise in bond yields in the short term. Since its launch in 2003 OMP's returns have been ahead of the sector average and despite a big increase in total assets, the fund does not appear to have reached a size that will unduly restrict its flexibility.

Financial Mail - 23 September 2005

Property share prices increased during the quarter on the back of an unexpected 0,5% interest rate cut and strong sector distribution growth. The Reserve Bank surprised the market by cutting interest rates 0.5% in April, citing the importance of SA's growth prospects. The repo rate is now 7% and the prime overdraft rate 10.5%. Bond and property yields fell in response to the interest rate cut, resulting in capital gains.

Many companies with interest rate fixes are unwinding these to take advantage of more beneficial rates. This benefit falls straight to the bottom line of the listed property companies. Thus investors can expect the property funds to provide strong resilience to a potential rise in bond yields in the short term.

Inflation remains under control despite the consumer Price Index excluding mortgages (CPIX) ticking up marginally. The outlook for interest rates remains flat. Producer price inflation continues to pull the CPIX figures down.

Speculation of a further interest rate cut this year is mixed, with oil prices of above $55 posing a threat to inflation. Market consensus is that CPIX bottomed in February 2005 at 3.1% and will increase during the months ahead. This could result in upward pressure on short term bond yields.

Current property fundamentals continue to improve. SA Property Owners Association (SAPOA) and Rode research reports still confirm that the commercial property market is responding well to current fundamentals. Industrial and retail property, in particular, are benefiting most. Both property sectors benefit from a strong consumer and low interest rates, while the recovering office sector is driven more by corporate SA growth prospects. The likelihood of further sector earnings and distribution growth remains very strong.

Property share prices increased over the quarter on the back of strong distribution growth. At quarter end, the US Fed has indicated that it intended raising US interest rates steadily over the next year. This caused a strengthening of the dollar, which resulted in SA bond and property yields increasing. As a consequence, SA property share prices fell, taking a shine off the recent strong performance. Despite this, results published by various PUTs and PLSs were extremely favourable and this bodes well for the future growth of distributions.
At the end of the quarter, inflation remained under control with a relatively strong rand still keeping import prices down. Despite oil prices ticking up and the related medium term inflation pressures, the outlook for interest rates remains flat. Market consensus is that CPiX has bottomed at 3,1% and will increase in the months ahead. This could put further pressure on bond yields and, consequently, listed property share prices should remain relatively flat.
SAPOA and Rode research reports continue to confirm that the commercial property market is responding well to current fundamentals. Retail and industrial properties are benefiting most.
The SA listed property sector's total return was 5,5% during the quarter due to strong distribution growth. The property cycle remains very positive as a result of relatively low inflation, 23-year low interest rates, a strong retail sector and improving demand for space. However, much of this good news has already been priced in, so the likelihood of strong capital returns for the rest of the year appears limited.

Share prices continued to move up on the back of strong distribution performance, firmer bond yields, steady inflation figures, a very strong rand and good prospects of a further interest rate cut in February 2005. Despite this, the bond yield differential still suggests that listed property offers good value relative to bonds and cash, particularly for the property loan stock companies. Retail property continues to perform well as the consumer has thrived in the positive local economic environment. As a result, bond yields fell further during the quarter with property yields following suit.
Current property fundamentals continue to improve. SAPOA and Rode research reports confirm that the commercial property market is recovering. Retail is ahead of the curve with industrial property following closely as both property types benefit from a strong consumer. Offices are more aligned to corporate growth prospects and 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.
The SA listed property sector share prices increased during the quarter and now seem to be fairly priced. Despite this, further upside is still expected through earnings growth and firmer yields. The domestic economic environment remains positive as a result of relatively low inflation, 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 two years.