Listed property set for further growth

The JSE property sector had another bumper year in 2012 and maintained its position as the best performing asset for the fourth consecutive year but 2013 may see the performance of the sector cooling down.

 Listed property posted a 36% total return in 2012 compared to 22% return from shares. Listed property is treated as a separate asset class given its unique behaviour that blends characters of fixed property, bonds and shares.

The JSE listed property sector has grown in leaps and bounds over the past few years on the back of a movement of fixed property into the JSE. This movement is largely propelled by private property owners who want more liquidity by exchanging their fixed property investments for paper. The sector’s total market cap has moved from about R10bn about ten years ago to surpass the R100bn mark.

Observers point out that while a slowdown was expected in 2013, the sector’s performance will remain robust partly benefiting from the establishment of the Real Estate Investment Trust (REIT) regime. The REIT regime takes shape through finalisation of legislation that will govern the behaviour of property funds which will migrate into the internationally recognised structure when the regime is established in April.

“Introducing the new South African REIT in April 2013, will be a positive catalyst for the sector in the coming year, says Mark Wainer CEO of the second largest listed property Fund Redefine Properties.

“Apart from the many benefits of the new REIT legislation, including tax certainty, it should result more international investors in our sector. Interest from international investors remains high and this is where growth will come from.”

Nobert Sasse, CEO of the largest listed property fund in the country Growthpoint Properties, concurs. Sasse who also serves as the chairman of the Property Loan Stock Association (PLSA) said the REIT structure was coming to shape a solid base for South Africa’s listed property sector to grow with tax certainty. “We look forward to finalising the JSE Listing Requirements for REITs, which is one of the last steps in formally implementing REITs in South Africa.”

Sasse expects listed property total returns of between 10% and 16% in 2013. This is in line with the expectation of other observers.  Wainer expects total return of between 14% and 18%.

Head of Listed Property Funds for Stanlib Keillen Ndlovu says the sector will deliver decent growth numbers matching or above inflation, protecting investors’ income against inflation.

“Listed property income should grow by over 6% in 2013 and improve to 7% in 2014,” says Ndlovu. “Our base case for listed property total returns in 2013 is 9%. Our bull case forecasts 16% total returns and our bear case only forecasts 2.2%. The biggest driver of changes in total returns is movement in bond yields.”

Observers are however concerned that a further downgrade of South Africa’s credit rating would hurt the sector. “This would result in a sell-off of South African bonds and depress the price of listed property securities.”

With most of its component funds on a keen growth trajectory, the sector should continue growing in the year ahead. For some companies, gaining new assets won’t be easy. Wainer explains that acquiring prime properties is increasingly difficult for listed property companies, and this challenge will persist in 2013. “Smaller funds should enjoy high levels of acquisitions though,” says Wainer.

Sasse also noted that another is a threat to listed property’s performance. “This would weaken the Rand with knock-on effects for the domestic banking and bond markets. The resultant spike in inflation and interest rates would lower listed property prices”. He added that the growing labour market tensions are bad for business, and have an unsettling potential to impact the commercial property space.”

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