Listed property to yield less in short term

The global "search for yield" over the past three years has produced a close correlation between bonds and listed property - which are both yield-bearing investments. Volatility is expected to remain in the short term.

Sector heavyweights Growthpoint and Redefine have contributed toward about half of the fall.

Electus investment analyst Gregory Cort says the most significant effect of the fall in share prices and market caps will be the ability of listed property companies to acquire or dispose of assets without diluting their yields.

Cort says when yields in the listed space are low, listed players target developments or acquisitions in the direct market where yields are generally higher.

However, after the recent sell-off in the listed sector, yields have climbed significantly and "unless the direct market moves in tandem it makes it more difficult to do yield-enhancing deals", thereby "putting a brake" on many acquisition and development opportunities.

However, he says the direct market generally lags the listed sector where shares trade daily. While there are exceptions, "generally, the listed market is at a premium because of its liquidity compared to the direct market".

Furthermore, Cort says companies' borrowing costs have also risen with higher bond yields, and as listed groups use both debt and equity to fund deals, this will also affect potential deals "if direct yields don't move".

Cort says volatility and price falls in the listed space are largely due to the substantial rise in bond yields, which listed property has tracked "very closely".

He says listed property, which provides a stable income stream, remains an attractive investment over the long term. While "there might be some knock-on effect" of falling prices and market caps on future deals, "other than that the fundamentals are still intact".

Ashburton Investments property fund manager Lesiba Ledwaba says until recent listed property has "been a beneficiary of massive and aggressive quantitative easing by global central banks, a strategy which led to the global search for yield". With their correlation to bond yields, listed property yields "compressed to approximately 6%", Ledwaba says.

However, the recent decline in the listed property index "is largely attributable to a sell-off in bonds as the US Federal Reserve hinted that they may begin reducing bond purchases should US economic growth gain traction".

"Recent volatility in the listed property sector is expected to continue in the coming months, as the market analyses or digests the various economic indicators outlined by the US Fed as triggers for slowing the quantum of quantitative easing," Ledwaba says.

Grindrod Asset Management chief investment officer Ian Anderson says while current listed property yields and distribution forecasts "make the sector look attractive in absolute terms, given that interest rates are likely to stay lower for longer, the sector will remain vulnerable to rising bond yields in the short term".

Anderson says share price weakness in the sector will make it "increasingly difficult" for listed groups to do yield-enhancing acquisitions, given that "the value of their paper is so much lower".

Prescient Investment Management fixed-interest strategist JP du Plessis says: "We still think there's a lot of risk to our bond market." Rising US bond yields are reducing the attractiveness of South African bonds and other yield-bearing assets such as property, he says.

Also, the performance of bonds this year may lead investors to reconsider whether bond and property investments are as safe as previously thought.

Du Plessis says volatility could remain in the short term. "I wouldn't be surprised if there wasn't further weakness to come in bonds and property, he says.

While listed property has "had a terrific run ... the overall returns of listed property have been high relative to underlying earnings growth, and the market is returning to equilibrium".

Source: Business Day