Listed property offers fair value
27-11-2002
Despite a poor prognosis for rental (income) growth in the medium term, listed property still represents good value for property investors wanting a relatively secure income stream. Thus this investment class is still a credible alternative to long bonds, say property economists Rode & Associates in their latest review of the property market.
According to Dirk De Vynck, editor of Rode's Report on the SA Property Market, these conclusions stem from Rode's analysis of PUTs’ market rating, expressed as the income (“dividend”) yield, over the last 17 years, which shows that this asset class is cheap at present.
However, at the same time, the market’s rating of PUTs has over the long term weakened relative to that of long bonds. Thus, using bonds as comparative tool, De Vynck similarly concludes that listed properties are currently cheap.
Possible reasons for PUTs’ recent weaker performance relative to bonds could be a growing demand for SA bonds and growing market belief in the possibility of lower inflation, as well as government’s strict fiscal policy, “which of course was positive for the lowering (strengthening) of bond yields”.
"On the other hand, our comparison of listed and directly-held property in quarter 2002:3 shows that the value gap between the two is only about 4% now, compared to 18% in quarter 2002:1 and 7% in quarter 2002:2. This means that PUTs are trading at a discount of only about 4% to directly-held property. The narrowing of the value gap is a move in the right direction, and improves the possibility of more directly-held property coming to the listed property market."
Rode's latest survey of office rentals in the country’s major CBDs shows tentative signs of a recovery. This improvement is especially evident in the performance of nominal rentals, which have accelerated in the last three quarters after showing little growth for almost two years.
In nominal terms, rentals in all the CBDs were on the up, except Pretoria, where the movement was sideways. Despite the stress experienced by the Durban CBD, rentals have still been quite resilient, especially when compared with the Johannesburg and Pretoria CBDs. However, the Cape Town CBD is the only one that has been able to maintain the real rental levels seen a decade ago.
In the decentralised office nodes, average national real rentals continued to lose ground. This was evident in all the major decentralised office nodes, although Pretoria has succeeded the best in handling the oversupply situation. Notwithstanding this oversupply, decentralised office demand (total space occupied) in the suburbs of Johannesburg, Pretoria and Durban remained on the up in quarter 2002:2.
"In Cape Town decentralised, we suspect that, on average, office demand has at least remained flat over the last few quarters." The reason why Rode cannot confirm this is that Sapoa’s office vacancy surveys, which are used as basis for its interpretations, do not include the growth nodes of Century City and the V&A Waterfront.
On average, capitalization (cap) rates for all property types in South Africa continued their upward inclination in quarter 2002:3, a trend that has been evident since the beginning of 2001. This is an indication that investors’ general perception of nonresidential property is still worsening, presumably in the light of the cyclical oversupply.
Capitalization rates, the property equivalent of the forward earnings yields of equity, reflect investors' perceptions. As such, higher capitalization rates mean lower market values.
Real industrial rentals in all the major industrial conurbations continued their precipitous dive in quarter 2002:3. The Cape Peninsula has been the hardest hit in the last year. This negative trend follows on the slowdown in the Western Cape’s economy as well as on the over-building of industrial space. "The drop was long overdue in the light of the fact that vacancies had already started rising in about 1996," De Vynck says.
On average, real flat rentals in all the major metro areas, barring the Johannesburg metro, fell in quarter 2002:3. However, in light of the recent hikes in interest rates, flat accommodation could increase in popularity over the next few months. The reason for this is that an increase in interest rates has a negative effect on the affordability of housing, which normally leads to a greater demand for rental accommodation.
Staying with residential property, real house prices in the upper- and middle-priced suburbs of South Africa’s main cities continued their triumphant progression in quarter 2002:1. This was despite the two 1%-point interest rate hikes since the end of 2001. "However, since quarter 2002:2 we have had two additional interest rate hikes, and this should surely have a moderating impact on economic growth and house prices."
