List property portfolios – at your peril

30-05-2002

The recent sharp rise in long-bond rates have pushed down property unit trust (PUT) prices, which makes it difficult for owners of directly-held property to list their portfolios on the JSE Securities Exchange SA (JSE) right now.

Rode CEO Erwin Rode says he expects portfolio owners would lose as much of 18% in value if they chose to list now.

This has already dashed the hopes of the shareholders of at least one property group wishing to list on the JSE. IProp shareholders, hoping to benefit from the proposed unbundling of the property group, now have to wait longer before iProp's property assets may be transferred to a new company called iFour, which is to be listed as a property loan stock on the JSE.

"I expect that as soon as inflation expectations decrease, the gap between listed and directly-held property will again shrink and maybe even disappear. Listed properties are thus a good buy right now," Rode says.

The market considers listed property as a substitute for long bonds and vice versa. "That means the market does not expect too much cash flow growth from properties. Thus, when long-bond yields rise due to higher inflation expectations brought about by the crash of the external value of the rand, we can expect listed properties' income yields to trend the same way.

"This has destroyed a considerable amount of capital value, as rising income yields and capitalization rates mean decreased market value," Rode says. The latest issue of the Rode's Report on the SA Property Market states that, apart from higher bond yields, the listless performance from listed property since 2001 can partly be attributed to a general slowdown in rental income growth.

Rode's latest analysis for the first quarter of 2002 shows that listed properties are on average 18% undervalued relative to directly-held property. This represents a further widening in the gap from the 15% undervaluation in the previous Rode analysis, in the fourth quarter of 2001.