The sector has experienced high levels of volatility over the past two months, in line with bond yields, although analysts say the fundamentals of local listed property remain intact and robust. Nevertheless, volatility in the sector could remain for some time.
Listed property and bonds, both yield-bearing investments, have been closely correlated over the past few years as investors continue to search for yield. The sector had a strong run at the beginning of this year, until it saw a rapid decline in mid-May that continued early last month.
Stuart-Findlay said on Tuesday (16 July) that in the first half of this year, the sector generated an income return of 3.1%, while returns from distribution growth counted for a further 4%.
"However, the strong gains last year from a re-rating perspective on the back of lower bond yields have abated. Following the recent correction, prices have normalised to levels seen at the beginning of the year, highlighting that the yield compression seen in the first four months of the year was overdone," Stuart-Findlay said.
He said Investec Asset Management believed valuations were now at a level which is more conducive to the generation of sustainable returns in future.
"We believe it is unrealistic to expect the South African listed property sector to repeat the exceptional returns from last year, as it is unlikely that the sector can continue to re-rate with yields moving lower.
"However, returns between 10% and 12% can be achieved from current levels, considering a healthy yield and solid distribution growth," Stuart-Findlay added.
Distribution growth for the sector was expected to accelerate to levels above the long-term average, growing at about 7.5% this year, followed by about 7.8% next year.
He said continued pressure on domestic bonds posed the highest risk to short-term price movements in the sector.
Source: Business Day via I-Net Bridge
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