Despite a remarkable recovery that has seen listed property grow 53% in nine months after plummeting 26% in May and June last year, retail investors have not been moving back into the sector.
Len van Niekerk, property fund manager at Old Mutual Investment Group, says investors are quick to panic but slow to see opportunities, bailing out after massive losses but not benefiting from ensuing recoveries.
While most analysts agree that listed property is not offering short- term value at current prices, Van Niekerk says it remains an attractive sector for long-term investors and those looking for income.
“These are the best fundamentals we have seen in decades, but everything comes at a price,” says Van Niekerk, arguing that, compared to alternatives, property still looks good.
He estimates a total return of 11% to 12% from listed property, compared to 9% from bonds and 8% from cash. While equities are expected to perform a bit better at 12% to 13%, they don’t offer the same levels of income for income investors.
According to Sunel Veldtman, director at BJM Private Client Services, the company is not expecting capital growth from the sector at these prices. However, it continues to invest in listed property for the income, with an expected forward distribution yield of about 7,3%.
Veldtman is also expecting solid growth in distributions going forward. “The office sector is set to provide the best returns in the short term, while retail should provide the best long-term performance,” she says.
The fundamentals for commercial property remain strong and, traditionally, property cycles are fairly long and not as volatile as other investments.
Van Niekerk says we are a little more than two years into the current upward cycle and, given economic conditions, he expects the trend to last another three years.
As the economy continues to grow, so does tenant demand, which is outstripping supply in the sector.
Growth has outpaced investment over the past few years, creating a backlog.
Going forward, high building costs, cement capacity issues and a lack of infrastructure will mean that supply will continue to lag behind demand.
Van Niekerk says the supply problem is being compounded by a shortage of infrastructure and services. It can take up to two years for a developer to secure the power supply for a development. “This means we will see less property coming on stream and rental vacancies will come down.”
This will also positively affect residential rentals, which have been under pressure for a while with oversupply.
If one looks at business nodes, especially in decentralised areas, there are virtually no vacancies, which means that rentals will have to start climbing. Despite strong performance, rentals are still relatively low compared to historic levels, and could easily double, which feeds into higher income for investors. Van Niekerk expects an increase in distribution growth of about 11% to 12% a year.
With regard to capital growth, return expectations have come down.
“Understand what you are buying. Listed property in South Africa is exposed to bond and cash rates which could make it [the sector] vulnerable. But it is ultimately underpinned by strong growth. The growth tide is rising, so the risk is lower in the sector,” says Van Niekerk, who recommends entering the listed property sector over several months rather than with a lump sum because of the increased risk for shorter-term volatility.