Listed property 'lacks value' for investors

JSE-listed property funds are overpriced at current levels as a result of a strong run in this sector in recent years, according asset manager, RE:CM.

John Rainier, property analyst at RE:CM, said on Tuesday the listed property sector was more expensive than it had been for a number of years, with prices having grown much faster than earnings.

"The South African economy is still under pressure and the property market is not immune from this. With inflation currently exceeding the upper limits of its range, it is difficult to say whether interest rates, both long and short-term, can meaningfully decrease during the year.

"The pricing of property, just like other income bearing investments, is inversely related to moves in interest rates. With the economic woes the world is currently subject to, there must be additional upside risks which can continue to exert pressure on all property prices."

He said prices of listed property funds were being driven by a search for yield among investors. "The sector is currently offering a 7.7% income yield, while cash offers less than 6%."

However, he said investors in the sector were taking on significant risk as it was unlikely that earnings growth would be sustained at previous levels. "We have recently seen the first few earnings reports going backwards. After inflation, earnings growth for the sector is currently negative, compared with the average of over three percentage points since 2004."

Rainier explained that the correct time to start investing in listed property would be when the market had absorbed all the bad news and investors were shying away from the investment. "In the late 1980's early 1990's, no one wanted to touch property. The market was therefore mispriced and the returns were proved to be great. The time to invest will therefore be after a few years of disappointing earnings growth, which will effectively change pricing perceptions.

"Sooner or later the market will disappoint and adjust accordingly. Opportunities will then once again come around for investors. This time has just not arrived yet."

Pockets of value do however exist, said Rainier. "The industrial market is showing some interesting signs of resurgence, but the office sector is looking rather weak, and could get even weaker."

He added that there were without a doubt some "cheap" offshore property stocks available. However, he believed if one was looking to diversify into other currency regimes, there were many even better, well-priced companies available to give a rand-hedge element to an investment portfolio.