SA’s listed property sector has held up well in current downturn

The South African listed property sector has withstood the impact of the current global economic crisis better than almost all other sectors – but a full-scale property revival is now unlikely until the last quarter of 2010.

This was the brace-yourselves message that Mike Flax, Executive Director of Madison Property Fund Managers, had for members of the Cape property press who had asked him for his “take” on the current situation.

Referring back to a comment he made some four months ago – that the JSE’s property funds had “in the main” a “silver lining” because for the foreseeable future demand for office and industrial space is likely to exceed available stock – Flax said that this had created a scenario in which the average growth in distributions from the listed property sector are still in line with inflation and more attractive to investors than those of government bonds.

“The traditional margin of 1 to 1,5% between the yields on government bonds and those of the listed property sector has now widened to slightly over 2%. This has opened up opportunities for carry-trade investors to invest in the property sector.”

The current satisfactory distribution growth from listed property could, said Flax, drop into single digit figures in the year ahead but in his view there is almost no chance of their showing negative growth going forward.

“The only funds at risk could be those with a heavy bias towards the retail sector,” he said.

Asked to explain his reasons for predicting that a full-scale revival will not happen until late 2010, Flax said that it will largely depend on greatly reduced interest rates now needed to stimulate the economy.

“Because inflation is now less of a threat we do see rates being cut sooner rather than later (i.e. in December) and we expect further cuts in 2009 to take us back to the interest rate levels of 2005 – but rates will have to be at these levels for some time before we see the residential-led upswing we anticipate.”

Development and redevelopment activity will be cut back for two years and many small and medium sized contractors will find themselves struggling to come through, said Flax – but the major contractors will continue to benefit from the big infrastructural projects that a wise state fiscal policy over the last decade has made possible.

Madison itself, said Flax, will have to be more cautious on greenfields developments for its three major “client” partners, Redefine, Hyprop and Apex-Hi.

2009 should see “a lot of activity” in the proposed Madison International vulture fund, said Flax. The reaction to initial talks about the new fund had been very positive.

“The market appears to accept that Mark Wainer, Wolf Cessman and myself have picked up expertise in unearthing heavily discounted listed property gems. In Europe and Australia opportunities are now available to buy at massive discounts to their net tangible asset values. Our new investors are now looking to us to repeat offshore the successes that we have already had here.”

The new fund, he said, will be listed in Bermuda and should be reality by March/April 2009.

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