FROM being the long-standing star sector just three months ago, listed property has taken a massive knock since interest rates were raised a few weeks ago. But while listed property unit trusts have fallen sharply down the performance tables, they could now be offering much better value.
Ross Biggs, portfolio manager at Prudential Portfolio Managers, said that in the past quarter, “the most shocking performance of all the sectors was delivered by property”.
However, “we believe that substantial increases in commercial and industrial property rentals will result in higher distributions [to unitholders] and this, together with the recent dramatic decline in listed property share prices, means that the property sector now offers good value”.
James Templeton, spokesperson for the Association of Property Unit Trusts, said if the belief is that the long-term outlook for property is good, “which we do”, then it is a buy.
Templeton said the big-picture view of South Africa is positive. “We think inflation may be on a short-term spike but on the longer term on decline”. He expects a possible interest rake hike of up to 100 basis points within the next year before falling again in the longer term.
“The fundamentals for property, assuming no major shock, are looking positive,” he said.
The negatives are that debt costs have risen and are expected to do so even further, but Templeton does not expect the recent hike in rates to cool things off significantly. He points out that even in the worst-case scenarios of 1991 and 1998, distributions for the sector as a whole never fell.
But for investors it’s a question of how much of the expected rate hikes are already priced in.
Mike Flax, chief executive of listed property loan stock Spearhead Property Holdings, said now is the time to buy. He pointed out that one can now buy stocks on forward yields of 10% and distributions are not cooling off.
“The underlying market is strong and is expected to remain so for a number of years as vacancies continue to fall and rentals rise way ahead of inflation.
“The expectation is for double-digit growth in distributions from the sector for the next three years.
“Prices probably won’t react to another 1% increase, but may find little or no capital growth in the next six months during the volatile period,” says Flax.