Listed property takes a dive

The South African listed property sector has gone down by 7,4% between the 3rd and the 10th of March. According to Mike Flax, an executive director of Madison Property Fund Managers, from the end of 2007 the South African listed property sector has been impacted by unit price volatility on the back of a declining US market.

"Listed property has been quite volatile since the beginning of the year," he says. "This is not the first week where it has lost and gained up to 10% of its value. It's a roller coaster ride.

"The world effectively looks different for listed property in 2008 compared to 2007."

Flax explains that we have seen a decline in distributions because rand and bond markets have deteriorated substantially. "There is a strong correlation between the listed property sector and bonds, with property following bond yields," he says. "So it's a reaction to weaker bond prices.

"It is not due to fundamentals changing noticeably. At most they have changed marginally due to Eskom outages, which have an impact on GDP growth and a forward impact on rentals.

"So the outlook is not as bullish as it was in December, but it's still positive. On the retail side though it's more bearish as shopping centre property will mirror consumer spending over the longer term."

Evan Robins, property analyst at Nedbank Securities, concurs with Flax that the listed sector has dropped in value because bonds have risen so much. "Long bonds have risen due to a weak rand and inflationary concerns, which includes the rising oil price," he says. "The real question though is why was listed property so strong in February 2008 – it went up 4,5% in February – and now so weak? I think it's because it took a while to react to bond yields rising.

"Since the beginning of February bond yields went up 50 basis points, with 30 of those going up since the beginning of March. Now the listed sector is down to mid January levels after falling 7,4%.

"The future of the listed property sector depends on bond yields which are vulnerable, and which I predict will remain vulnerable for the foreseeable future. Property overall is still fine, although fine cracks may start appearing."

According to Len van Niekerk, head of Quoted Property at Old Mutual Investment Group South Africa, capital or price volatility is here to stay for the foreseeable future. "Investors need to adopt longer term time horizons and accept that volatility is here to stay," he says. "Volatility is also not limited to property but extends across the entire JSE. There is no haven from volatility at the moment. With that in mind, I do however predict that property companies should still show 11% income growth for the next three years."

Flax points out that real estate has lost its shine on the global stage. "It had a good seven-year run and we know that bull market cycles come to an end," he says. "South Africa is still slightly behind the cycle.

"Currently our rental markets are recovering strongly. My view is that we shouldn't expect any further sell-offs in the South Africa property sector and that overall capital price growth rates are likely to match inflation in the mid-single digits."

Flax also emphasizes that South African shares have not fallen nearly as much as US, UK and Australian Real Estate Investment Trusts (REITs). "Some of these funds are down 50% from their peaks. So there's a very big difference between South African funds and their counterparts offshore," he says. "Certainly in South Africa's office and industrial sectors there is generally expectation that even with lower growth there should be distribution growth in the lower double digits for the next three years. In the retail focus funds there may be growth into single digits in line with inflation over the next few years.

"This is in marked contrast with the US and UK where recessionary conditions are looming." – Kara Michaels

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