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Aug 22, 2007:
The recent drop in South African Property Unit Trust (PUT) share prices has caused some concern in the listed property market.
Analysts have generally attributed this softness in the market to the following combination of reasons: 1. Central banks around the world are raising interest rates; 2. The effect of the sub-prime blow-up on liquidity and credit in the USA, and its effect on global markets; and 3. Negative sentiment regarding markets generally.
Going back, during the first half of 2007 the South African listed property sector outperformed the FTSE/JSE All Share Index and was at the time the best performing local asset class.
At the time Phillip Worz of Alphen Asset Management noted that it was interesting that listed property, which the textbooks tell us is usually seen as a rather defensive play and is supposedly deemed to behave more like bonds, had outperformed the ALSI again, if only by a small margin.
He was of the opinion then that the reason for it could have been because investors still liked the exposure to commercial property because a strong economy continued to provide an underpin for rentals and property values for these property companies.
Shortly after that the South African listed property sector remained surprisingly resilient in the face of global equity markets and the FTSE/JSE taking a battering during the global sell-off in equities around the end of July 2007.
The FTSE/JSE South African listed property index lost only 2% in total return during the sell-off despite the potential negative impact a weaker currency could have had on bond yields.
At the time analysts attributed the resilience of listed property to the expectation of strong distribution growth from two thirds of listed properties due to report results in August 2007.
However, the reasons for its resilience at the time are uncertain, but its resilience did show that there is strong demand from investors for South African listed property.
And then the listed property index's total return of 1,39% last month was good in the face of uncertain short-term interest rates and inflation. Listed property delivered a total return of 17,71% for the year to last month. This includes income yield and capital growth.
"I think that fundamentally real estate is globally and locally in a very good position. There is good gross domestic product (GDP) growth worldwide, demand for space is strong, supply is generally limited (for example, in South Africa we have capacity constraints both in terms of human resources and raw materials, as well as zoned land in good positions in strong growth nodes), and there is global infrastructure expansion which puts further pressure on prices," says Craig Hallowes, spokesperson for the Association of Property Unit Trusts.
"In the short term, while the market digests the effects of central banks around the world raising interest rates, the effect of the sub-prime blow-up on liquidity and credit in the USA and its effect on global markets and a poor feeling for markets generally, we expect to see some volatility in the market, but hopefully this will subside as the strong growth fundamentals for real estate take effect."
This upbeat view is shared by many analysts who feel that property fundamentals are strong as a result of good economic growth over the past few years and that the prospects for income distribution growth from listed property are good.
And of interest is that listed property companies and funds that have reported financial results in the past few weeks have all recorded double-digit distribution growth. – Kara Michaels
