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Jun 04, 2007:
The Reserve Bank is set to take action against brazen spendthrift behaviour on Thursday.
Although the long-term good prospects for listed property may still be intact, the rich returns offered by the sector makes it especially vulnerable in the short term to a possible further interest rate hike. The market consensus is that the Monetary Policy Committee (MPC) will announce a 50-basis point rate hike on Thursday; a fair number expect this to be followed up by an additional rate rise in August.
Edwin Schultz, portfolio manager at Coronation Fund Managers, told RSG Geldsake met Moneyweb that the prospect of a rate hike this week, and the possibility of ensuing policy tightening, is negative for listed property companies.
Higher interest rates push up the cost of servicing these companies' debt; it also nudges the yield on long-term government bonds, which typically is strongly correlated with the yields on listed property, higher.
Schultz explains that the sturdy performance delivered by the listed property sector on the JSE Ltd adds to the vulnerability of the sector: on average, these listed stocks have generated total returns of around 24% over the year to date.
Eleven out of eighteen economists polled by Reuters believe the MPC will move rates higher by 50 basis points this week. Additionally, five of these expect a follow-up hike in August.
Noelani King Conradie, from NKC Independent Economists, says she is amongst those who expect two more interest rate increases. She says that, aside from last week's inflation and credit growth numbers, which point to inflationary pressures, there are further risks that could add to these pressures. These include movements in the oil price, food prices and the rand.
Last week's trade numbers confirmed that the current-account deficit remains a potential driver of rand weakness in the medium to long term. King Conradie argues that we have already seen the start of a turnaround in the local currency.
Additionally, since the rand is a proxy for emerging-market risk, owing to its highly liquid status, it is especially vulnerable to swings in global sentiment towards developing markets.
Long-term property prospects are good
But property expert Erwin Rode says that short-term developments in the financial markets hardly even register on the radar screens of property investors, whose timeframe is very long term.
He says he remains a proponent of listed property investments. Compared with listed industrial stocks, for instance, the market risk is lower, while property - whether listed or physical - is usually a defensive investment.
Rode says that, although one would be paying dearly now for listed funds compared with a year ago, these prices are not onerous compared with the rest of the market. He adds that one can expect the income stream from property to grow at about 15% per annum; with capital growth this could imply total returns of around 20%.
