Listed property in 2010 : Consider this

Listed property has already notched up decent returns in 2010, according to Albert Arntz, portfolio manager of the Prudential Enhanced SA Property Tracker Fund.

He points out that in the first six months of the year the South Africa Listed Property index returned 10.6 percent, outperforming the FTSE/JSE All Share index by 14.7 percent. Property has also produced higher returns than cash and bonds. During this period the BESA ALL Bond Index returned 5.6 percent while cash returned 3.2 percent.

Arntz says in South Africa, the underlying assets of listed property are largely commercial rather than residential properties including industrial warehouses, shopping malls, and both high and low rise offices. He contends that despite the shorter-term volatility and risks of investing in listed property it has the potential to provide a high yield, capital growth and should form a part of a diversified investment portfolio.

According to an analysis by Prudential Portfolio managers, when you add both global and South African property to a portfolio, it shifts the efficient frontier out (increasing the potential returns for a given level of risk). The uplift in the efficient frontier is not as significant for global property as local listed property, but is still improvement.

Arntz, points out that along with bonds, listed property provides a reasonably predictable income stream. This is an advantage for any investor wishing to diversify their income-generating portfolio. He says while income-production is important, one can benefit from capital growth over the medium-to-longer term. Listed property can be seen as a "quasireal" asset. After allowing for maintenance costs one can expect the value to grow over time, even if not matching the inflation rate over the long term.

The drivers of listed property returns, according to Arntz, include the inflation expectations embedded in long bond yields, GDP growth - particularly growth in consumer spending as retail property makes up the bulk of listed fund portfolios - building activity and building cost inflation, and corporate credit spreads. Regarding market rental declines, Arntz explains this decrease does not mean that listed property earnings will decline in the short-term.

"Property funds are only exposed to market rental declines on the portion of leases that expire annually. For a typical listed property fund, on average, only around 20 percent of leases expire annually. The remaining 80 percent of leases have rentals that escalate contractually by 8-9 percent per annum.

"In our view it is unlikely that we will suffer the same level of overbuild of commercial property in the current cycle that we experienced in the late 1990s and early 2000s. This is partly attributable to stricter credit scoring by commercial banks. In many cases market rentals for office and industrial properties are also below feasibility rentals for new developments. Although national vacancy factors have risen, they are not significantly above long-run averages.

"This suggests simplistically that the commercial property market has not reached a position of oversupply yet. There are exceptions to this within individual property nodes," says Arntz.

One positive scenario for listed property in the coming year, according to Arntz, is that the SARB keeps interest rates on hold or even reduces them. The economic outlook continues improving and analysts expect vacancy factors to stabilise and then gradually decline. Listed property re-rates to distribution yields below, or in other words, more expensive than long-run averages. In this scenario property may deliver a total return above 15 percent.

The Mercury

Posted at 08:31AM Jul 30, 2010 by Editor in Market  |  Comments[2]