Commercial property prospects strong

Vukile Property Fund chief executive Laurence Rapp says it is hard to see any dramatic re-rating of the sector given the level of interest rates at the moment.

"Therefore earnings growth will be the primary driver of overall share price performance," says Rapp.

Redefine Properties' chief executive Marc Wainer says while the listed property sector is not expected to deliver total returns in the same league as the 35% recorded last year, he is expecting total returns to be in a band of between 15% and 18%.

Grindrod Asset Management chief investment officer Ian Anderson says with distribution growth expected to accelerate towards 8% this year and next, South Africa's listed property sector "looks poised for another year of inflation-beating returns, although not the 36% plus return investors enjoyed last year".

He says the introduction of real estate investment trust (Reit) legislation in April will lead to increased interest from foreign investors, while the Reserve Bank is likely to keep interest rates at historically low levels while economic growth remains sluggish.

"This should lend support to current valuations and the combination of a 6.5% initial yield and 8% distribution growth should translate into total returns in excess of 10% this year," says Anderson.

Vacancies lower

Anderson says most listed property companies have reported a moderate reduction in vacancies, as well as a reduction in the cost of debt, both of which should support higher distribution growth this year and next.

"At the same time, corporate activity in the sector remains high, with a number of companies having announced major property acquisitions from private investors as well as redevelopments on existing properties in their portfolios. This corporate activity is for the most part earnings-enhancing and should lead to higher distribution growth throughout 2013 and 2014."

He says the largest listed property companies have used their critical mass to push through lower expense growth, which also contributed to higher distribution growth last year and may also help bolster distributions this year. He adds that although the listed property sector tends to invest in the "very highest quality properties", some companies and funds will not be able to produce inflation-beating distribution growth this year because of their above-average exposure to the struggling office property sector.

"Another factor which may place pressure on distribution growth for some companies and funds are double-digit increases in property operating expenses, but as mentioned, the larger listed property companies have been using their critical mass to negotiate better rates on security, cleaning and property management which have kept these expenses in check," says Anderson.

Angelique de Rauville, fund manager at Investec Asset Management, is expecting distribution growth of between 5% and 6% from the listed property sector over the next 12 months and that this will drive total returns to between 12% and 15%, assuming interest rates remain stable.

"In the next 12 months we can expect growth to exceed this with distributions likely to grow at more than 7%. Retail will be the leading sector and offices the laggard. The over-supply of offices will create a drag on earnings as lease renewals across this sector will be flat."

Retail property

De Rauville says listed property companies with large exposures to retail property such as Hyprop Investments, Resilient Property Income Fund and the like are expected to outperform some of the others. She also says it is worth watching some of the smaller funds and their ability to improve their performances.

"The likes of Arrowhead, Fortress, Vunani, Investec Property Fund and Dipula have interesting prospects and strong management teams who will add value and produce above-sector average returns for unit-holders," she says.

Keillen Ndlovu, head of listed property funds at Stanlib, says Stanlib is expecting income growth of between 6.5% and 7% over the next two years.

"We believe that listed property can deliver total returns of between 9% and 10% a year over the next two years. The risk for the sector lies in the bond yields. The weakness of the rand is a concern," says Ndlovu.

He says rising operating costs remain a worry, as well as rates, taxes and electricity.

"There is a huge gap in yields between established or quality property companies and the newly listed or smaller property companies. Some of the newly listed companies are likely to re-rate as they establish track records and deliver results in line with or better than forecast," says Ndlovu.

"Listed property has helped boost returns in balanced portfolios over the year and has also helped to reduce volatility thus helping to create better risk-adjusted returns," he added.

Frank Berkeley, managing executive of Nedbank Corporate Property Finance, says what is important is that yields in the listed property sector are high and particularly attractive to pension funds, which do not get taxed.

"Pension funds are receiving after-tax yields of 7% (from listed property), which is exceptionally attractive. As a result, they continue investing in listed property stocks," says Berkeley.

"What I don't think we see in the sector is a large enough differential in yields between the top quality funds and the lower quality funds. I think the poorer quality funds are optimistically valued and I think some of the good quality stocks are undervalued," he added.

Source: Business Day via I-Net Bridge