Property Demand Narrows Yield

THE difference in yield between the listed property sector and the long-bond rate is becoming narrower thanks to the rise in demand for commercial property in South Africa.

Government long bonds are regarded as one of the safest investments one can make because there is little chance the state will default on payments.

The fact that property capitalisation rates are converging towards 8.25% might have investors wondering if there is still value to be had in listed property.

Les Weil, the chairman of JHI Real Estate, a property researcher and service provider, says that over the past 12 months the yield on listed property has fallen by 300 basis points (3 percentage points).

"There's [previously] always been a gap. This indicates property is in high territory - but it's because of the growth potential in property."

He says that demand for good property assets - because there is a dearth of strongly performing asset classes around the world - has helped push down the sector's initial yield. However, he questions whether investors are fuelling the sector to "dangerous" levels. Weil says as long as there is potential for real earnings growth in the sector, investors should not worry.

Evan Robins, fixed-interest analyst at BoE Private Clients, says that unlike bond coupons, the distributions of listed property companies can increase.

Weil says escalations in rents and the decline in interest rates allow property loan stocks and property unit trusts to increase their distributions.

Robins says that listed property's decline in yield is only bad news for new investors in the sector "in the sense that you get less of a yield spread for income", but says that this is a reflection of the market pricing in better prospects for distribution growth.

Besides, with the prevailing interest rate having fallen, he agrees with Weil that "people are getting desperate for yield". Robins says the distributions from listed property should increase by at least 3% over the next year, though he says that at the moment the sector's growth is running at about 6%.

For the risk-averse investor concerned about interest-rate movements, Robins says bonds are in fact safer in that they tend not to react as sensitively to rate changes as property loan stocks.

Article by: Chris Needham -