With share prices of listed property collapsing by 20% on the back of the rate hike in June and fears of future rate hikes, retail investors bailed out of the sector, according to the latest figures from the Association of Collective Investments.
For the quarter ending June, investors were net sellers of unit trust real estate funds to the tune of R500-million. This compared to an inflow of R3-billion for the first three months of the year.
According to fund managers, most of the selling took place after the announced rate hike and the selling has continued into July, with massive outflows from property income funds that invest in listed property. This would suggest that next quarter’s figures will show further outflows from the sector. Fund managers also believe that the bulk of the sellers have been retail investors rather than institutional.
While investors may not have been sucked into the strong run on equities earlier this year, it would seem they were once again attracted to strong capital returns, this time in the property sector. With the massive sell-off it is clear that investors did not go into property for the yields, as recommended by professional managers, but rather for capital gain. Retail clients have once again got caught up in the buy high, sell low cycle.
According to Mark Appleton, chief investment officer at Barnard Jacobs Mellet Private Client Services, retail investors have over-reacted. “It is important that investors remember that they bought listed property for the yields. With share prices having fallen, property yields are now in excess of 9% on a forward basis. Now would be a good time to get into listed property and capitalise on what looks like an oversold position.”
Appleton argues that forecasted distributions from listed property are unlikely to be dampened a great deal by a further rate hike of 100 basis points. “We are seeing very strong growth in rentals from commercial property which is being driven by increasing demand.”
Appleton says that, given the high building costs, there is a shortage of new office developments coming to the market. This is putting supply under pressure. For example, to justify building an A-grade office block in Sandton, rentals substantially above current market rates would need to be achieved. “This means we will continue to see rentals climb,” says Appleton.
Industrial property is also still looking strong, especially on the demand side for warehousing. “Although the manufacturing sector has been under pressure owing to the strong rand, our imports have been increasing and we need somewhere to put the goods. So warehouses are in demand.”
Appleton says the real growth will come out of office space and that retail property will stabilise, having already experienced massive growth on the back of the consumer boom over the past few years.