Strong rand benefits listed property

05-05-2003

While the rand's consistent rise spells bad news for SA rand-hedge stocks, investors in listed property have reason to be happy because this sector closely tracks the long-bond yield, which is drifting lower as US and European investors pour money into SA long bonds.

JSE indices are dropping as investors abandon resources stocks, fearing lower earnings. About 60% of the top 40 stocks on the JSE are rand-hedged.

Because of the sluggish US and European economies, investors from these countries are investing (borrowed or "hot") money in SA long bonds, benefiting from relatively high interest rates in South Africa. The increased demand is pushing up long-bond prices, thus forcing down yields.

Listed property's income yields, says property economist Erwin Rode, closely track long-bond yields, with the result that the sliding long-bond yields are reflected in the listed-property income yields too — which, in turn, means slightly higher market values for these stocks.

Long-bond yields dropped from 11,2% in December to 10,95% in mid-April. But while yields are dropping, the rate of decrease is slowing down — possibly because investors are expecting the rand to strengthen again and thus reverse matters, or because they consider long bonds to be fair value at current levels.

Will this continue? "Taking a six-month view," says Rode, "foreign investors face a currency risk, should the rand suddenly weaken. But the chances are very good that the US dollar will also weaken from its present level, given the state of the US economy. Furthermore, the rand is strengthening in its own right, as can be seen from the advances made against the euro."

Rode says the strengthening rand indirectly also benefits non-listed commercial and industrial property since it helps reverse inflationary tendencies. "And inflation is bad for economic growth in the medium term."

Turning to the possible negative effect of the strengthening rand on up-market house prices in Cape Town, Rode points out that foreigners buy these houses more for lifestyle reasons than as an investment. This statement is supported by the fact that foreigners hardly buy houses beyond the Boland and Peninsula, no matter what the exchange rate of the rand. But even from an investment point of view, Rode reckons one should consider that the rand is now (early May 2003) still much weaker against both the US dollar and the euro than what it was in the beginning of January 2000. "And in 2000 foreign buyers were already piling into the Cape upscale house market."

"Furthermore, still assuming for the moment that investment criteria are important to foreign investors, one should consider that European and US investors have run out of investment options in their domestic markets. Granted, the fact that a house in Clifton is now 20% more expensive in euros than a few months ago might psychologically induce some hesitancy in the minds of buyers, but this is unlikely to last."

Thus Rode concludes that the sharp hike in the value of the rand can be expected to have "little, if any, effect" on the upscale residential property market in South Africa. A greater potential threat to up-market house prices countrywide is the possible slowdown in the SA economy, because upscale house prices are significantly influenced by economic activity.