Gradual returns for direct property sector

ALTHOUGH data shows the direct property sector delivered an improved 9.2% return for the first six months of this year, industry pundits expect price weakness in the listed sector to gradually filter to the direct market.

The South African Property Owners Association-Investment Property Databank (IPD) South Africa biannual property indicator, released on Wednesday, showed that the direct sector’s 9.2% total return outperformed the December biannual total return of 8.9%.

The performance to the end of June was driven by “high” capital growth of 4.9% and an income return of 4.2% over the period, the IPD said.

Stan Garrun, executive director and head of SA at the IPD, said on Wednesday that the retail sector continued to dominate, while the industrial market improved in a number of key aspects but offices “continue to bear the brunt of it”.

“There are conflicting signs, which in an uninspiring economy will make interesting reading for property investors over the next six months,” he said.

Analysts and listed property CEOs expect the recent price weakness and volatility in the listed sector — as a result of shifting bond yields — to result in direct property prices being gradually revised downwards.

Listed property and bonds are closely correlated as they are both income-generating investments.

Electus investment analyst Gregory Cort said yesterday that with price declines in the listed sector, “you would expect in time that it would filter through to the direct market”.

“The direct market tends to not react as quickly to movements in bonds yields,” as the listed sector was more liquid, he said.

“What happens in the listed sector will have an indirect impact on the direct sector simply because listed companies are purchasers, sellers and developers of property, and whether or not transactions and developments go ahead depends on relative yields.” Mr Cort said that while capital and income growth had slowed over the past few years, the fundamentals of the direct market “have held up well” and the property market “is still healthy”.

Vunani Property Investment Fund CEO Rob Kane said last month acquisition opportunities were starting to return to the listed sector as the expectations of sellers were being revised following the listed sector’s price re-rating. He said the fund had been unable “to see value” in acquisition opportunities, given inflated property prices.

He said it was likely still to take a few months for prices to be reasonable, but the price correction of May and June “brings a bit of sanity to the market”.