Holders of listed property company shares have watched in horror as prices have plummet month after month since the latter part of 2007. Not so long ago, this sector was something of a stock market darling, producing marvellous returns for investors and attracting more fans, as a result.
So what has gone wrong? And will things improve for these investors any time soon? The listed property analysts at Catalyst Fund Managers tackle investors' concerns in their latest monthly report.
The good news is: for long-term investors, JSE property companies look like a solid bet.
If, on the other hand, your financial goals are short-term, then stick to cash, like a high interest bearing bank account or money market fund, is their message.
The SA Listed Property Index (J253) recorded a total return of -8.71% for June 2008. The Property Loan Stock Index (J256) and Property Unit Trust Index (J255) recorded returns of -8.22% and -9.98% respectively over the same period, noted the Catalyst analysts.
The SA Listed Property Sector has "experienced a significant valuation decline, having pulled back over 30%, since its high on the 7th November 2007".
The current pullback in share prices, they said, is a result of global and domestic concerns that have together made investors more risk-averse.
That, in turn, means investors have been looking for higher returns in compensation for risk or less-risky assets. There has been a "global flight to safety and a focus on short term capital protection".
"Mr Mboweni's actions to curb inflation have made cash look attractive on an income yield basis relative to other income type investments (e.g. bonds and property).
"Over the past 8 months (since the listed property sector high) cash yields have increased in line with interest rate hikes and are approximately 1,50% higher. Cash is providing an attractive income yield with the guarantee of capital protection," said the Catalyst report.
Turning to the link between property and bonds, the report said: "Since the 7th November 2007 listed property initial yields have weakened by approximately 487bps compared to the yield to maturity on long bonds which have weakened by 260bps. Bond and property share prices are inversely related to their yields.
"As yields increase, capital prices decrease," it said.
In the current cycle investors are showing a preference for high income yielding cash - with no income growth but capital protection - over lower income yielding listed property (with income growth and capital upside/ downside potential), said Catalyst.
Property investors are not alone: all interest-rate sensitive companies have taken a beating on the stock market.
Catalyst said "inflation expectations appear to be the factor that is causing the most fear".
"The catalyst for a recovery is likely to be when there is market consensus that inflation is under control and there is certainty surrounding when and at what level inflation will peak."
Catalyst said market expectations are for inflation to peak at 11,3% in the third quarter of this year and that the market is pricing in the strong possibility of another 1% hike in interest rates over the next six months.
After that, general expectations are that the worst is over and that real gross domestic product will come in at just over 3,4% this year and about 3,7% for 2009 for South Africa.
But, if there's another nasty interest rate surprise or these expectations "deteriorate", listed property company investors can expect more pain. These shares "will not be immune from further declines and the period until the cycle turns will be extended," the report added.
Now may be a good time to consider stocking up on property companies - as directors of these organisations have indeed been doing of late.
"The prospects for income growth continue to remain favourable as current supply does not meet current demand and the ability to bring new supply to market is constrained by a number of barriers," noted Catalyst.
For short-term investors, "cash provides an attractive income yield with capital protection whereas listed property provides a lower income yield, income growth but no capital protection".
"For a long-term investor, listed property provides an attractive alternative to cash and bonds," said these fund managers.
