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South African Listed Property On the Growth Path

2013 is expected to see note-worthy growth for South African listed property according market experts. We are well into the year and from this vantage point the rest of 2013 is looking healthy as the sector out-performs equities, cash and bonds for the fourth year running.

Property Loan Stock Association (PLSA) chairman and CEO of Growthpoint Properties Limited believes investors can expect distribution growth from the sector to average between 5% and 8% in 2013. He anticipates listed property total returns between 10% and 16%. These figures are well below the total returns of 2012, though positive nevertheless. The advantage of this sector is that it can uniquely predict its short-term performance with good levels of accuracy, as its performance is underpinned with rental income from contractual agreements.

Sass reported to the Property Loan Stock Association (PLSA) that “With tougher market conditions overall, companies that can manage vacancies and costs are better positioned to deliver performance for investors,” says Sasse. “Sectoral portfolio composition will also influence performance. Weak demand will continue in the office sector. However, retail and industrial property will perform well off a base of low vacancies that should remain stable.”

The Property Loan Stock Association (PLSA) is the representative umbrella body of the property loan stock sector comprised of voluntary members, with the weight of nearly all of the funds within the sector behind it. The association has been modelled on NAREIT (National Association of Real Estate Investment Trusts) in the United States.

The PLSA newsroom quotes head of Listed Property Funds for Stanlib’s Keillen Ndlovu, who anticipates growth in the sector equal to or greater than inflation, thereby protecting investors’ income against inflation. She said: “listed property income should grow by over 6% in 2013 and improve to 7% in 2014. Our base case for listed property total returns in 2013 is 9%. Our bull case forecasts 16% total returns and our bear case only forecasts 2.2%.” The conventional wisdom here is that listed property is a great diversifier. It produces a regular source of growing income and capital growth over time.
Norbett Sasse predicts corporate activity from the sector carrying into 2013, especially the merging of smaller funds creating a critical mass in defence of hungry larger funds aggressively pursuing acquisition strategies.

It seems that newly listed property companies are continuing their growth strategies. However, they are beginning to step on each other’s toes as there’s limited physical property stock out there. Most listed property funds are playing in similar territories. Limited stock means that listed property companies will start to eye each other. This could lead to mergers and takeovers.

During the last two years, the sector saw a spate of new listings. While more companies are expected to join the sector, the number is likely to decrease in 2013. South Africa’s first residential listed property fund could debut this year. Equity raisings are looking to remain prominent in the sector, but not to the same extent as in recent years. About R11 billion of equity came into the listed property space in 2012. In 2011, it was about R16 billion.

April saw REIT (Real Estate Investment Trust) legislation being introduced in South Africa. Spearheaded by the PLSA for its positive impacts on the sector, this legislation will provide tax certainty and align South Africa with global investment structures and established REIT markets like the US, Australia, Hong Kong, Singapore and the UK.

US REITs Keeping an Eye on your Neighbour

So it’s a well-worn phrase, “when America has the flu the rest of the world catches a cold.” But it’s hard to deny the influence of US trends. Following trends in the US REIT market may just give you the edge here in South Africa as REITs begin to manifest.

The Property Loan Stock Association have been working with National Treasury for over five years to formalise Real Estate Investment Trust (REIT) legislation in South Africa. The internationally-recognised REIT structure exists in countries such as the US, Australia, Belgium, France, Hong Kong, Japan, Singapore and the UK. So it seems prudent to keep an eye on the international ball as more and more REITs are going to be making their presence felt here in South Africa soon.

Scanning the US, February results highlight the role that dividend yields are playing to attract investors to the REIT sector. Total returns in February were largely driven by dividends, rather than price appreciation. REITs continue to attract investors because their dividends are more appealing than other investment opportunities in the current low interest rate environment.

The strongest in the REIT sector is the mortgage REIT’s 11.49% February dividend yield, although the sector’s total return was 1.65%. Everything once ‘tainted’ with the word mortgage seems to be shaking that stigma as each month progresses. In February, two new home financing mortgage REITs announced IPOs, Maryland-based Zais Financial (ZFC), who raised $201.1 million, and Florida-based Orchid Island Capital (ORC), that raised $35.4 million.

For lodging, regional malls, timber, self-storage and industrial REITs, February dividend yields measured between 2.5% and 3.0%. With the exception of timber, total returns for each of these sectors were negative in February, indicating that investors may not have the stomach for REITs with lower dividend yields.

REITs that own single tenant retail facilities, free standing Retail REITs, climbed to a steady 5.37% in February. Since tenants are liable for all costs, free standing retail REITs’ leases are not unlike bonds in that they generate regular income over extensive periods of time with low risk, especially if the tenant has a strong credit rating.

With monthly returns of 5.35%, returns for Health Care REITs were similar to that of free standing REITs. The positive effects of Obamacare as opposed to the negative impacts of the sequester have influenced investors here. The 4.44% dividend yield helped to fuel the strong monthly returns. It’s becoming clearer to investors that the Healthcare REIT market is less dependent of the US government than previously believed.

A number of REIT sectors had February dividend yields in the 3% to 4% range. Boosted by their dividend pay outs, general shopping centres (3.80%), manufactured homes (4.32%), and office (2.85%) REITs had solid monthly total returns.

One may note that the S&P market did better than the REIT market In February. Although US REIT return growth slowed in February, performance was on a par with wider international market trends. Improving market fundamentals and higher dividend yields continue to attract investors. As we wait for March results there is anticipation that it will be a stronger month than February.