Listed properties now more attractive than long bonds
08-03-2005
Outstanding returns on listed property in South Africa over the past number of years have boosted demand for listed property as an asset class.
Rode & Associates property economist Erwin Rode says that until now, the price boom had been driven by declining bond yields, but he is expecting healthy returns to continue because of improving fundamentals, more specifically declining vacancy levels, and growing market rentals.
The increased demand for listed property is not restricted to the South African market, but is a global phenomenon. According to Pramerica Real Estate Investors the global listed-property sector's market capitalization has more than quadrupled over the past 10 years - from about US$130 billion in 1994 to more than US$ 536 billion by late 2004.
Much of this growth has occurred in the last three years and has been concentrated in the US and Australia, the two largest and most mature listed-property markets in the world. Over the last decade, the market capitalization of the US and Australian listed property sectors has grown at a compound annual rate of more than 20%, according to figures supplied by ResearchWorldwide.com. In contrast, the annual growth rate for the rest of the listed market was 6%.
In SA, over the last three years, listed property returned 41%, 41%, and 23% (estimated); while the rest of the listed market posted 25%, 16% and -8%, according to Chris Naidoo, asset manager at Metropolitan Asset Managers (MetAM). MetAM forecasts a return of 18% on listed property over the current year.
Naidoo says the sector’s market capitalization and liquidity have risen sharply with an increasing number of investors in unlisted property choosing to sell their investments into a listed vehicle. The property portfolios of listed companies have grown via acquisitions on the back of higher share ratings. The change in legislation allowing Property Unit Trusts (PUTs) to gear their balance sheet up to 30%, also contributed to the growth in assets.
The latest Rode’s Report 2005:1 reveals that in the last quarter of 2004, PUT yields fell below those of long bonds for the first time since 1997. Rode points out that although capitalization rates declined over the same quarter, PUT yields fell even faster, resulting in a negative yield gap. He ascribes this to the increased demand for listed property due to rosy income-growth prospects.
Rode explains that while long bonds offer safe, risk-free investments, many investors are opting for the higher-risk option of listed property funds because they expect the income growth to be high enough to compensate for the additional risk.
Rode says the market has already discounted an expected income growth rate for listed properties of about 4% p.a.
