In car-industry terms, the listed property sector has just survived a high-impact “crash test” and demonstrated its built-in strength, according to Mariette Warner, head of property funds at Stanlib Asset Management.
The crash test was laid on by South African Reserve Bank Governor Tito Mboweni in late March with his comments on inflation and hints of higher interest rates.
Says Warner: “A year ago, this would have had a significant effect on listed property. This time around, one of the flagship listed property unit trusts — the Stanlib Property Income Fund — hit a record high of 257 cents per unit while the JSE sector ticked higher by about 2%.
“This is a strong signal that some very positive changes have taken place within listed property. The sector is not immune to adverse commentary, but its resilience and ability to bounce back are there for all to see.”
Like bonds, property unit trusts have an inverse relationship with interest rates. Historically, their values fall as rates rise (or threaten to rise).
Contributors to improved resilience, according to Stanlib’s award-winning property investment specialist, are better quality portfolios at listed property companies along with overall category growth.
“Years ago, there was a market suspicion that the average property company portfolio was a dumping ground for buildings the major institutions didn’t want,” says Warner. “That’s changed. Stronger players are highly selective.
“Good properties plus good management create an expectation of earnings growth and solid rental flows — helping top performers and listed property unit trusts with a quality bias to withstand negative speculation.”
Sector growth has been substantial. Three years ago when the Stanlib Property Income Fund was launched, only two counters in the category had a market capitalisation of more than R2-billion. Today, 13 companies are above this level, almost half the sector.
Three years ago, the properties in most company portfolios were considered under-valued, creating capital growth opportunities. Values have since firmed, suggesting capital growth may be less dramatic in future.
At the same time the “yield gap” between bonds and listed properties has closed. As recently as the first half of 2004, an investor could expect the yield to be 1% higher on listed property than on bonds. Currently, yields are about the same.
Warner notes: “Listed property maintains its appeal because of high earnings and expectations of more to come. If property income is growing and the yield is going up, income growth acts as a buffer to the price. For yield to remain the same, the price must go up.
“As investors become more confident of the earnings growth pattern, so they are prepared to pay prices for property on historic yields that are lower than bond yields. This is because property’s growth element means the forward yield is the same as bonds and is expected to grow further. This is the reason for higher returns from property than bonds in recent years.”
Leading property companies have been paying investors anything from 10% to 18% more income than a year ago. Rentals are higher; vacancies and the cost of debt lower.
On average, listed property has outperformed equities and bonds over three, five and 10 years. But quality and stability are just as important, insists Warner.
She adds: “Studies of annualised risk within investment portfolios show that risk is higher in portfolios with zero property exposure and can be better controlled by adopting a 10% or 15% property weighting. This suggests that listed property is not just a favourite with the public, but also with astute fund managers.”
Warner is confident that growth in good-quality, modern property stock can be maintained. She explains: “Investment in private, non-residential property has averaged 1,5% of GDP [gross domestic product] since 1949, but has been falling since 1997 and by 2003 was down to 1%.
“Assuming 4% GDP growth to 2014, investment into private, non-residential property will have to grow by a compound average annual rate of 8,7% in real terms in order to get back to the 1,5% average.
“This is a solid underpin for long-term growth in non-residential property investment.”