Property experts give their views.
PRETORIA - Despite continued speculation that the commercial property sector is headed for a bust, Efficient Group asset managers have turned bullish on listed property and are betting that listed property will outperform the All Share Index (Alsi) in 2010.
Total returns for the ALSI are expected to be between 9 and 12% for the year, while prominent property analysts have set the figures at 11 to 17% for the listed property sector. According to Efficient unit trust managers Valugro, the key drivers for this are a peak in rising vacancies, continued low interest rates and economic recovery.
“The message from management in general throughout the listed property sector is that average portfolio vacancies seem to have peaked, or will peak within six months or so, which means the outlook on demand going forward leans towards the positive,” says Valugro analyst Neel Rust.
Efficient Chief Economist Dawie Roodt adds that the impact of lowered interest rates has not yet filtered through to the commercial property sector and is overdue. “The recession definitely increased the lag between lowered interest rates and property sector response, but it has been more than two years, so we should start seeing that response soon.”
In lieu of recent press surrounding unlisted property investment syndicates, such as Sharemax (see Sharemax MD defends most ambitious syndication to date), we asked Roodt what his views were on listed property versus unlisted property. “Listed property is a much safer investment, because it is more liquid. It is an exchange traded stock so pricing is more transparent and it’s easier to offload than non-listed stock. Further you’re looking at commissions which seldom exceed 2% when trading listed property stock, whereas you could pay as much as 20% to buy and sell non-listed property shares.”
When asked to single out potential winners among listed property companies, Valugro’s Neel Rust opted for Redefine (RDF), Emira (EMI) and Vukile (VKE).
“We’ve been backing Redefine for some time now, and it remains one of our favoured property counters. We believe the market is not fully pricing in the merger driven growth (from the merger with ApexHi and Madison in 2009), possibly due to management’s inability to make good on overly positive guidance in the recent past,” says Rust.
He points out that Redefine is currently trading at a sector average forward yield of +-9.4% and is one of the two largest players in the listed property sector (21% weight in the index).
“We feel that the market is being overly cautious, and that the stock should be trading at a yield below that of the sector. It seems though, that investors have started picking up on this, as RDF has outperformed the index year-to-date (9.8% vs. 8.4% of the sector). ”
On Emira (EMI), Rust says although it is much smaller than Redefine, its fundamentals are sound. “The company has indicated that they are ahead of budget and rental escalations and renewals are ticking along smoothly. At a near 10% forward yield, and an 8% underperformance to the sector year-to-date, we are happy to hold on to EMI.”
He was also positive about Vukile, ”(It) is a much smaller player in the sector, but management has proven themselves in the past, and trading at +10% forward yield, this also looks attractive.”
“In a listed property market where capital returns might be more muted compared to prior years, we place a premium on the near certain cash yield that the sector offers,” says Rust.
He agrees it is unlikely that the property sector will ever repeat the rapid growth it saw in the decade leading up to the recession, but he insists that the listed property sector remains a solid choice during times of volatility and risk aversion.
Despite oversupply in especially the office sector Rust believes it is a question of “picking one’s battles”.
“Redefine is an example of a company with a sizable exposure to the office sector, but a large portion of its old B and C-grade ApexHi assets are being let to government at below market rates. So positive rental renewals are still very likely here.”
Macquarie First South Securities property analyst Leon Allison isn’t convinced that a 17% growth rate in total returns for the sector is achievable. “Look it’s possible, but I think it is too high, we can’t rely on that, I’d say we are looking at similar returns to the Alsi, but at lower risk and that is the bottom line.”
Allison also cautioned that the vacancy cycle in the property sector has probably not peaked yet and is only likely to do so during the second half of the year. He further felt that listed property shares were on the expensive side. He did however concede that the stock market on the whole didn’t look cheap. “I believe we’re looking at total returns of about 10% (for the listed property sector) for the year, of which 9% percent is income return, so I expect minimal capital growth from here on.”
“But we are not in a high return environment and I believe there can still be considerable volatility in the markets. Taking this into account, the 9% income return is relatively certain, so as a defensive play, listed property is not a bad call.”
FNB Property Strategist John Loos shares the sentiment that vacancy rates haven’t yet reached their peak, but he believes the commercial property sector is beginning to ripen for picking. “There is a lot of building activity still, which is a concern, this suggests for the time being that vacancies will continue to rise in office and industrial space. I don’t think they have created quite the oversupply that residential did, but there is an oversupply.”
“Our data shows capital depreciation, rising vacancy, so it is a weak time, it doesn’t look like it is quite at its bottom yet, but it (the commercial property sector) is definitely improving as a buying opportunity.”
Leoni Kok