Recent results in the property sector states that the performance of the property stocks are sustained only due to the mercy of the bond markets, which is been seen generally weak and unstable since mid-May.
According to some analysts- Major imbalance in the property stocks is due to the close relationship between the returns of the nominal bonds and the property stocks.
Since past few years a close correlation is generated between the bonds and the listed property
due to the global “search for yield”.
In May the US Federal Chairman Reserve Chairman Ben Bernanke said that the Fed would reduce its monthly bond buying or quantitative easing. Due to this the local bonds and the listed property have been unstable.
Norbert Sasse - the CEO of Growthpoint Properties said that in last month the listed property sector including them would have continued with ups and downs in the share price due to their step towards “a structural shift in global bond yields”.
This is along with the fact that the fundamentals of Growthpoint’s business are strong enough- Mr. Sasse says. He said that the company had achieved the growth of 7.2% to 149c per linked unit for the year ended June.
Both, the local bond and the rand strengthened yesterday due to the surprise announcement of Federal Reserve on Wednesday that it will continue buying the US bonds at the rate of $85bn a month.
Growthpoint’s share price reorganised approx 4.1% yesterday to R24.65, while Redefine Properties shares closed at 1.57% higher at R9.72 and Hyprop investments shares closed 1.46% up to R75.
Analysts says that rejection in the interest rates and bond yields over the past few years have sustained the listed property sector. While some other says that though the relation between the bond and property stocks is assured, property stocks have equity features including capital growth and should behave as a combination of bonds and equities.
Chief investment officer Ian Anderson at Grindrod Asset Management says that listed property’s 5% rally in the week ended September 13 was in response to the situation of stronger rand and lower bond returns, both globally and locally. Due to this the forward returns on the sector declined to 7.1% about 70 basis points lower returns on longer dated SA government bonds.
Anderson says that most investors compare the listed property to bonds by only considering the income asset offers.
Government bonds are not that riskier compared to the property yields as the income stream is guaranteed in government bonds.
Mr. Anderson says that what investors are likely to forget this unlike bonds, listed property has a growing income stream due to which the shares become more valuable. “since past 10 years the yields have been highly correlated so, the actual returns from the listed property is been about 15% per annum higher than the bond market.”
The total returns on the South African listed property index was seen 25% annually while the total returns on the bond index was 10% per year, between March 2003 and July.
A strong argument should be made on the returns from the listed property should be quite low that that from the bonds. However this level will depend on the number of investors who think that the income will grow or not.
He further said that “Higher growth will result in bigger difference, while at zero income growth you will find the listed property returns higher than the bond yields.” The best agent for the listed property over time would be “inflation linked bonds”.
While some investors are expecting only 4% or 5% income growth in the coming years while Mr. Anderson expects “The listed property’s distribution growth must be on an average or more than 7% per annum over the next three years”, as the face of the industry is changing due to the introduction of the Reit structure and companies are now borrowing more debts and internalising management functions.
At last Mr.Anderson said “Higher growth will support lower yields”.
