How property has fared, where it’s heading?
Want returns of 14%? And a smooth investment ride? Property will provide returns of this order, was the message from Len Van Niekerk, a property analyst who has been appointed as listed property company SA Corporate Real Estate Fund’s new managing director. SA Corporate (JSE: SAC) is an Old Mutual fund.
Listed property has produced returns in the region of 30% over the past year, however investors should not get their hopes up that this number can be repeated, he said.
Van Niekerk, who was speaking at the 7th Annual IPD/SAPOA Property Investment Conference in Cape Town this week, said that the listed property sector “has been pretty flat, but over a year it has done 30% simply because of where it was 12 months ago”. “I doubt very much you’ll get 30% in another year’s time. The year as a whole has been pretty much flat (-2,3% year-to-date)”.
He compared property to volatile shares, like resources stocks, saying property gives a less bumpy ride because of the income streams that are more secure, and illustrated how listed property has “handsomely” outperformed bonds (see charts at end of article).
“What are people actually buying when they buy property? It is about income streams. If you see the IPD (industry) numbers you can see relative stability in income over time compared to capital. I would almost love it if people would just forget about capital. Focus on income and the capital will be there in time.”
Turning to building vacancies – an obvious risk to those smooth income streams – Van Niekerk said he expects the number to double from about 3-4% for the real estate sector as a whole to 6-7%.
Surprising Van Niekerk is that there has not been a significant decline in plans being passed, with the exception of industrial property. Shopping centre plans continue to be passed at an astonishing rate. However, there has been a marked slowdown in trading densities at shopping centres “which has to ring a few alarm bells in terms of growth going forward”.
Van Niekerk said South Africa will “hopefully see a slowdown in amount of space coming online, and then we’ll see some stabilisation in vacancies”.
Aside from slowing rental revenue, property owners can also expect increased margin pressures from rates, taxes, electricity, tenant defaults and arrears.
However, he said, “we should hopefully start to see a stabilisation in those numbers probably around the end of 2010 into 2011”.
Van Niekerk, who bases much of his assessment on the Old Mutual Investment Group Property Investments’ house view on the economy, expects a stable interest rate environment over the next year. “Expect distribution growth to slow…You can expect returns of 14-15% which is a fair return. Whether it will do better than other asset classes is a matter of the relative game,” he said of property.
Others at the conference were less optimistic.
Neil Crosby, a professor of real estate at Reading University in the United Kingdom, told Van Niekerk he thought his views “look a little bit optimistic” and that he suspects of South Africa’s real estate community in general that “there is a lot of denial going on, so prices still have some way to go”.
Francois Viruly, a South African property economist who is professor in property studies at the University of the Witwatersrand, also wondered out loud whether vacancy rates were going to prove problematic and asked delegates whether the South African economy was different. There is a data lag, he noted.
Said Viruly: “For those who watch cartoon network – probably the only reality TV I watch – when a cartoon character comes off the cliff it treads in air, in denial, before it goes splat at the bottom. Much of the world has gone down that cliff. Are we that cartoon character treading water? Is it different here?”
Alex Phakathi, managing director of unlisted property loan stock company Pareto, said that looking at the property value numbers, South Africa appears to have “done well” relative to other countries. He referred to the possibility, as highlighted by Crosby, that the way valuers are assessing properties has “resulted in fairly rosy hues”. On the other hand we could be “very good in South Africa and just manage to get superior returns”.
Van Niekerk said South Africa has been “fortunate in terms of the economic slowdown” compared to regions like the UK. “We start in a stronger position: fully let and with a slowdown in new supply,” he said of the recession.
Another property company boss who is optimistic about real estate is Craig Hallowes, tasked with nursing Pangbourne (JSE: PAP) back into shape.
Hallowes, an executive director of the Pangbourne Group, said: “I’m of the view real estate is going to be the asset class to be in (over) the next couple of years.”
Nevertheless, he expects “volatility will remain high, both globally and in South Africa”. The “consensus time for recovery seems to be from 6 to 36 months, which is quite a spread”. “Property values may have stabilised, but that is not to say they will not go down,” said Hallowes.