Listed property index drops by 16%

The South African listed-property index (FTSE-JSE Sapy index) fell by 16% from its peak two weeks ago while the share price of sector heavyweight Growthpoint Properties shed 20% during the period.

Growthpoint opened a massive R2.5bn equity offering a day after the Sapy index reached its peak and closed the over-subscribed unit placement early the next day.

Investec Listed Property Investment's chief executive Angelique de Rauville says the correction in the listed-property market "is not altogether surprising because the sector had run exceptionally hard in the year to date".

However, while the correction itself was not a surprise, "the depth and the speed at which it has corrected has caught a few by surprise", De Rauville says.

Growthpoint's share price fall has also been the consequence of having a significant international investor base. "Growthpoint and Redefine Properties both have over 10% international shareholders, which sounds great, but it does create havoc with the share price in times of volatility," De Rauville says.

Further corrections?

A "worst-case scenario" would be a further 10% correction in listed property prices, given some market expectation of bond yields weakening further by another 10%.

While the Reserve Bank's decision to leave interest rates unchanged had little effect on the sector, the weakening bond market has had a direct impact.

Given the declining prices in the market, De Rauville says some property stocks "are starting to offer value at these levels".

"The most significant opportunities are within some of the sector's illiquid stocks, including Hyprop Investments, Resilient Property Income Fund and Fortress Income Fund," she says.

She says the prices of smaller companies have not corrected as significantly as larger ones, meaning larger stocks such as Growthpoint and Redefine are offering better value than some of the smaller ones.

De Rauville says some property companies may soon consider buying back their own stock "and making a short-term profit" on their recent equity raises.

Economy stuttering

Stanlib's head of listed property funds, Keillen Ndlovu, says the weakness in the listed-property market "was first driven by Growthpoint's R2.5bn equity raise".

"At the time, we thought the listed-property market would normalise about a day or two later," he said.

However, "things got worse" after interest rates were not cut, gross domestic product figures "came out worse than expected", SA's trade deficit exceeded market consensus, foreigners sold off South African bonds, the rand weakened as bond yields rose.

"As a result of the recent price fall, the one-year forward yield for the listed property sector has risen, from 6.1% early last month to just more than 7.2%," Ndlovu says.

"We believe that the current levels are presenting selective buying opportunities."

A week prior to the start of the decline, analysts had warned at the South African Property Owners Association convention that a correction was likely.

Anton de Goede, fund manager at Coronation Fund Managers, said at the convention the biggest risk to the sector was the prospects for bond yields. "Many of the returns in the local sector have been driven by listed property's correlation to the bond market," he says.

Source: Business Day via I-Net Bridge