Listed Property ahead of inflation

Despite a lacklustre economy, results reported by property stocks so far this month indicate that the sector as a whole is still achieving inflation-beating income growth.

That should please income chasers and support a further investment flow to the R190bn listed property sector. Listed property has achieved a 30% share price appreciation over the past 12 months on the back of what appears to be an ongoing search for yield.

Figures from Avior Research show that listed property funds have achieved close to an average weighted 6% growth in income payouts this year.

Counters that have surprised on the upside for the six months to June include retail-focused Hyprop Investments (+9,4%), Resilient Property Income Fund (+10,4%) and SA Corporate Real Estate Fund (+5,7%).

Hotel owner Hospitality Property Fund and Emira Property Fund saw a decrease in income distributions of 33,2% and 2,5% respectively for the year to June, but neither drop was unexpected.

Hospitality’s earnings were hammered by a weak trading environment and debt restructuring issues while Emira was hurt by its overexposure to older, secondary offices.

Avior Research property analyst Naeem Tilly says recent results are pointing to a widening performance gap among individual property stocks.

The counters with higher-rated, well-established management teams are starting to streak ahead of their less experienced counterparts, which Tilly says will require investors to become a lot more discerning in their stock selection.

While results don’t suggest any big improvement in property fundamentals in the short term, there seems to be a slow but steady downward trend in prime retail and industrial vacancies and rental arrears.

Tilly says that should support continued income growth in the region of 6% on average for the sector over the next 12 months.

However, the office market, particularly B-grade buildings, remains under pressure. “Clearly there’s still little confidence among businesses to expand, given the uncertain global economic environment. And there’s nothing to suggest that the trend will be changing any time soon.”

The recent strong run in share prices, coupled to the passable growth outlook, means that the sector is now trading at a forward yield of 6,7%. Though the sector may be looking expensive in historical terms, Tilly believes property stocks are still reasonably priced relative to incomegenerating assets like bonds and cash.

However, investors shouldn’t expect the recent price rally to continue indefinitely. Says Tilly: “International fund managers may start selling out of SA bonds over the next few months, which could lead to a downward rerating of property stocks.”

If the bond market doesn’t rerate, Tilly forecasts a total return of 14,5% for property stocks over the next 12 months.

Sesfikile Capital director Evan Jankelowitz agrees that the recent run in property share prices is unsustainable. “The key driver still lies in the bond yields and we are seeing some profit-taking. In addition, other asset classes are starting to offer relatively attractive and competitive yields.”

However, both Jankelowitz and Tilly believe the sector still offers a few buying opportunities for value seekers. Jankelowitz singles out Hyprop while Tilly likes Hospitality A and Rebosis Property Fund

Says Jankelowitz: “Hyprop came out with a great set of results. We don’t think the share price has been rewarded enough. Everyone is so fixated on the performance of rural shopping centres that investors may have underestimated the defensive nature of Hyprop’s prime metropolitan retail portfolio.”

Tilly says though demand for hotel rooms hasn’t yet recovered to the extent that justifies a bet on the sector, Hospitality A is attractive from a yield perspective. The stock is trading at 9,5% versus the sector’s 6,7%.

Rebosis also trades at around 8%, which Tilly believes offers value, given the quality of the fund’s shopping centres, its government-leased portfolio of office buildings and its strong development pipeline.