The listed property sector on the JSE had a surprisingly good year in 2014, thanks to buoyant retail figures, relatively benign moves in the bond market and a weakened rand.
There were also seven new local listings last year and although supportive conditions are expected to persist, 2015 may sort the wheat from the chaff.
Ndabe Mkhize, Deputy Chief Investment Officer at the Eskom Pension and Provident Fund but giving his own views and not those of the EPPF's managers, said 2014 beat everyone's expectations.
"We'd been expecting a low double-digit or high single-digit return, but the sector produced just over 26%, outperforming all other asset classes. The companies that did well tended to be retail-focused, with rand hedge attributes."
That total return was made up of 19% capital growth and nearly 8% income yield. Equities on the JSE brought a total return of 11% and the bond market 10%, by comparison.
The best-performing stock was Fortress Income Fund B with a 100% total return, which is a sister company of the larger Resilient Property Income Fund, up 60%.
"You also saw Arrowhead and NEPI [New Europe Property Investments] outperforming. Arrowhead is probably the only performer without rand hedge exposure, but NEPI is purely a European play."
The outperformers were typically focused on dominant retail centres and had rand hedge qualities. Corporate action and a relatively low price to net asset value round out the attributes Mkhize thinks will have companies continuing to deliver in 2015, when interest rates can be expected to rise.
Retail should continue to be the strongest of the three main sectors in listed property
"Retail should continue to be the strongest of the three main sectors in listed property, followed by industrial and office space. If the dollar and other strong currencies continue to maintain their strength, that should boost the stocks with exposure to offshore assets."
Sesfikile Capital Director Mohamed Kalla said Resilient and Hyprop also performed on the back of quality retail space, but the laggards were the bigger diversified plays such as Redefine and Growthpoint.
Kalla said he would have been bearish about the sector's prospects for 2015 just two weeks ago, but with inflation not under pressure and smallerthan-expected increases in bond yields, listed property's run should be extended.
"The sector is still offering forward yields of about 6.8% and distribution growth in the region of 8.5% to 9%. There is some stress in the office sector and retail is showing a few cracks, while industrial space is ticking along nicely.
"I think the sectors will still deliver in income growth perspective, but not as good as 2014. We expect a 12-month total return of 10% to 12%."
After some stocks ran hard in 2014, investors needed to be more selective this year, said Kalla. Not all of last year's debut listings have performed, but developer-focused listings were typically oversubscribed.
"Pivotal's [Property Fund] debut in December was eagerly anticipated, six to eight times oversubscribed, although it raised only R1-billion," Kalla said.
Mkhize said when interest rates did rise, stocks with less sensitivity to interest rates would do better, such as developers like Pivotal, Attacq and Acsion. "The one with the quality of buildings and price to NAV ratio on the good side is Pivotal."
Mkhize said he liked Synergy Income Fund because it was in the throes of being taken over by Vukile Property Fund.
"The lower its price goes, the quicker that deal might be finalised. It's already trading at a discount to NAV, while the rest of the sector trades at a 30% premium to NAV. It's also firmly in the retail sector; I expect it to do well."
He also expects Fortress Income Fund A to do well off a low price to NAV ratio, its retail holdings and rand hedge value through exposure to Rockcastle.
"Also, don't rule out Nepi, which was in the top six performing stocks last year and has full rand hedge exposure. It reminds me of Resilient about seven years ago in its growth phase.
Double-digit growth a possibility for 2015
"This is not sustainable, but for 2015, double-digit growth is possible while the sector is growing at 8%."
He said investors should not simply look at NEPI's low 4.5% yield, but should remember its dominance in the Romanian retail market and management's ability to buy the right properties, develop at high yields with a low cost of funding and within short time frames.
Furthermore, its returns should be less sensitive to rising South African interest rates.
According to Mkhize, a repeat spate of new listings in 2015 is unlikely because any company sitting on a sizeable portfolio, like Pivotal or Acsion, has already brought it to market.
"We might see some continuation of corporate action that began in the last couple of years, like the Vukile-Synergy deal, but I wouldn't expect another listing this year unless it's really unique. Another retail or office fund would have to offer a high yield to make people pay attention."
Not all new options have performed anyway. Kalla pointed out that the best of the new listings was Equites, up 10%.
"The worst performer was a small niche company called Freedom Property Fund, down 60% since listing. It's not a guarantee that listing will bring success.
"Fund managers are becoming more selective about the types of assets they want to see coming through."