Investors left wondering whether the property party is finally over

Is the party over for listed property in terms of capital growth? That is the question on investors' lips as the sector continues to shed value on the back of interest rate jitters in SA.

Unit prices of the sector, which has had boom times for the past three years, have shed about 20% since May. On Friday alone, the sector lost more than 4% of its value.

Reserve Bank governor Tito Mboweni warned last week that further interest rate hikes were possible after the current account deficit had soared to 6,4% of gross domestic product from 4,5% in the previous three months. He attributed this to the fact that money was too cheap.

Now listed property pundits are waiting with bated breath for the outcome of the US Federal Reserve Bank's monetary policy meeting tomorrow.

Rising interest rates in the US could signal further rate hikes in SA, negatively affecting the property sector.

Investec Listed Property Investments MD Angelique de Rauville says it would be bad for the industry to find itself in an environment where rates have risen another 1,5 percentage points.

"The economy would be adversely affected, which would be bad for the rental market, while distributions from listed property companies would come under pressure," she says.

However she believes that if interest rates are contained and increased gradually, listed property would still perform in line with expectations.

She says the main risk is that if the US continues to raise rates aggressively, it leaves SA's monetary policy committee no choice but to also increase rates.

"This would not be favourable for property. She says capital values will be volatile until there is certainty in terms of the direction of interest rates locally and globally. She encourages investors to consider that capital values of listed property stocks may fluctuate, but that income streams will continue to grow and remain predictable.

First South Securities property analyst Leon Allison says he has told investors that their expectations for returns from listed property this year should be constrained. Fundamentals remain positive and the underlying income streams for property companies for the next 12-18 months remain intact, says Allison.

"It is going to be more of an income play going forward and the main price risk for listed property is that bond yields could continue to spike upwards."

The performance of listed property tends to track the performance of bonds because they are both income-generating investments.

When bond yields go up, bond prices go down. Listed property generally tends to follow suit.

Business Day

Article by: Nick Wilson -