Listed South African real estate instruments are showing their mettle and continue to offer value in the global context, says Dr Prieur du Plessis, Plexus group chairman.

The global real estate market has recovered by a massive 65% in US dollar terms since the carnage ended in February 2009, according to Plexus Asset Management research into the performance of Real Estate Investment Trusts (REITs). The bear market saw prices, as measured by the Plexus Global GDP-weighted REIT Index, fall by more than 68% from the all-time high in January 2007. According to Du Plessis, the Plexus Global REIT Index is still more than 47% below the all-time high.

“Singapore and Canada have enjoyed spectacular price returns in excess of 90%, while South African real estate investment trusts returned a commendable 49,2% in US dollar terms,” says Du Plessis. “With prices down by 12,1% and 5,6% respectively since the top in the Global REIT Index in January 2007, South African and Hong Kong REITs have outshone the rest of the world.”

So how may the severe economic downswing in South Africa affect South African REITs? According to Du Plessis, “earnings growth of South African REITs, as measured by the FTSE/JSE Property Trust Index as proxy, tends to lag the economy,” says Du Plessis. “The BER Purchasing Managers Index (PMI), an excellent leading indicator for the South African economy, leads earnings growth of Property Trusts by approximately 15 months (see Graph C). Where the downswing in 2002/2003 severely impacted on earnings of listed property companies, it seems the impact of the current slowdown on the earnings of listed property companies will be limited,” says Du Plessis.

According to the recent Rode’s Report on the Property Market, commercial, industrial and residential rentals are feeling the pinch of weak economic conditions. However, yearly growth in rental markets remains positive, with surprising firmness in some areas. “The other most important factor in the profit equation is vacancy rates and, although increasing, these remain relatively low,” says Du Plessis. “The consensus forecast of analysts as per I-net indicates the market expects growth of the Property Trust Index to slow to 4,5% this year and then to accelerate by more than 7% next year,” adds Du Plessis.

On a historical basis the Property Trust Index is yielding 8,7% while one and two years out the Index is offering 9,1% and 9,7% respectively (see Table D). Similar yields and growth are forecast for Growthpoint. “These yields are not bad, given the current rate on cash and short-term notes,” comments Du Plessis. “It should be remembered, however, that dividends paid by property trusts and loan stock companies are taxable in the hands of the investor.”

In addition, there is capital risk to investing in listed property. According to Du Plessis, the capital value is highly correlated to long-dated bond yields. “If long-bond yields rise while the dividend remains unchanged, the tendency is for the market to require virtually a similar rise in the yield on listed property instruments such as property trusts (see Graph E),” says Du Plessis. “As a result the capital values of listed property decline notwithstanding an unchanged or increased underlying value of the listed property company’s property investments.”

According to Du Plessis a significant gap has opened between South African bond yields and those of the JP Morgan Emerging Market Bond Index. Emerging market bonds have significantly outperformed South African bonds on a price basis as global investors upped their risk appetite.

“As SA bonds currently offer excellent defensive value relative to other emerging-market bonds, the same can be said for South African listed property,” says Du Plessis. “However, the upward trend in sovereign risk may limit a significant re-rating of South African listed property.”

Although the market has probably bottomed and stabilised, the outlook for the other important property market, namely residential properties, remains grim, says Du Plessis. This is mainly due to households’ high debt levels and rising unemployment.

Those who wish to invest domestically in South African listed property can choose a range of domestic property unit trusts or JSE-listed property unit trusts. Those seeking exposure to international listed property can opt for rand-denominated foreign funds such as the Oasis Crescent International Property Equity Feeder Fund and Marriott Global Real Estate. Alternatively, one can invest in UK property through Liberty International.

Table A

Graph B

The resilience of the South African market is evident in the accompanying Graph B in which it is depicted against the Plexus GDP-weighted Global REIT Index.

Graph C

Table D

Graph E

Issued by:
Belinda Viret, Cadiz Street Communications

Article by: www.plexus.co.za