Listed property yields may fall

Gregory Cort (Image: Company website)

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 towards about half of the fall.

Old Mutual's Electus investment analyst Gregory Cort says the most significant effect of the fall in share prices and market capitalisations 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 sector are low, companies 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, thus 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 with 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.

Volatility and price

Cort says volatility and price falls in the listed sector 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 capitalisations on future deals, other than that the fundamentals are still intact.

Ashburton Investments property fund manager Lesiba Ledwaba says until recently 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 about 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.

Sector could be vulnerable

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 via I-Net Bridge