3 factors fuelling property equities

Staying out of JSE-listed property companies has proved to be a poor decision for unit trust managers like Marriott. What’s more, property bears could keep taking punishment as there are factors set to continue fuelling that sector of Johannesburg’s stock exchange.

That’s the message from Ndabe Mkhize, a co-portfolio manager of the Coronation Property Equity fund. He, like some other analysts, believes there are signs that property equities should keep delivering the goods for investors.

Mkhize said Coronation is seeing three drivers of listed property in general:
• Corporate action. Smaller listed equities are being absorbed by bigger ones;

• The Public Investment Corporation (PIC), which manages the massive government pension fund, has “pent-up demand for property”. The PIC wants to increase its allocation to property from about 6% to about 10%. This, said Mkhize, means “ a huge demand for property…in the order of billions of rands”; and

• Industrial and office sectors set to continue performing on the back of economic growth and related demand for these types of premises.

Land prices, lack of availability and building cost inflation will contribute to the latter driver, he said. Quarterly performance figures for the period to the end of September show that Marriott’s decision to have minimal exposure to publicly listed property cost its property equity unit trust fund holders dearly.

Its performance was around 19% over one year and about 27% for the three-year measurement period – at least 30% below the best-performer, Investec Property Equity Fund over one year and about 20% off that same winning fund over three years.

“During 2007 we positioned the portfolios conservatively as we had an expectation of rising interest rates and as a result, declining asset values. Interest rates have increased…however, asset values have yet to decline,” it said.

Marriott noted, too, that it was expecting prices to decline, hoping for a buying opportunity.The Coronation Equity Fund was not an impressive performer, judging from quarterly figures supplied by the Association of Collective Investments.

Over one-year Coronation’s was 13 out of 20 funds (about 39%, compared to Investec’s 53%). Although it was second-last over three years (35% compared to Investec’s 44%), it was still roughly 10% ahead of worst-performer Marriott (27%).
Mkhize said the Coronation fund was positioned to “focus on good quality companies with low downside risk”, however corporate activity had seen the other companies produce better returns.

“We are not bearish about property. The problem is the market isn’t discriminating between good quality companies and bad,” he said.

Meanwhile, managers of the top-performing Investec fund are also optimistic about property equities, particularly on a five to 10-year view in relation to bonds.

On a one to two-year view, however, listed property “isn’t looking cheap” compared to bonds, said Investec Property Investments’ head Angelique de Rauville.

* Marriott’s fund managers were not available for comment.

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