ance of the property sector is a function of technicalities rather than an asset class that is substantially attractive
relative to others.”
Mnguni says in Benguela’s opinion
these technicalities include investors’
hunger for higher yield relative to, for
example, the money market, growth in
income and stability of income even
given a possible tough economic environment.
In their pursuit for simultaneous
stability and growth of future income,
investors have bid property stock valuations to levels that have substantially
raised the level of price risk in the sector, he says.
“In a ‘normal investment environment’ where rationality prevails, one
would expect long-term government
bonds to trade at a premium to dividends in listed property, given the relatively low credit risk (it takes a lot of
‘political doing’ for a country to default on its bond payments).
Mnguni says despite the relationship being anomalous in the context
of long-term historic data, the property sector premium of 89 basis points
against government bonds has not only
been maintained in the past five years,
but has widened substantially to 145
basis points in the last 16 months.
In theory, investors appear to be so
confident about the prospects of the
property sector that they price them at
a substantial premium to government
bonds that are backed up by legislated
taxes, he says.
“We believe that this is not normal
and it is a matter of time before the
situation corrects,” Mnguni says.
He says while it is not yet clear
what could trigger the normalisation
process, there are at least four possibilities.
The first is that the economic challenges facing the South African and
global economies may put pressure
on businesses to a point where a substantial rise in property sector vacancy rates occur, which could in turn
threaten the stability and growth of
the income streams from the property
sector, he notes.
Mnguni says a sovereign risk downgrade may also trigger a sell-off in
bonds, which would in turn set off a
process to reassess the valuation risk of
assets like property stocks.
“The 1.4% real growth forecast
for South Africa will do very little to
assuage foreign investors’ concerns
around our debt levels and anemic
growth.”
A third possibility is that looming rate hikes may force investors to
impute the effect of higher funding
costs on underlying property loans
and therefore force them to reconsider
their property allocations.
However, the correction may also
be gradual in that as the sector delivers earnings and distributions, prices
remain around the current levels with
no meaningful re-ratings.
Mnguni says in a nutshell Benguela
believes that the risk of further “normalisation” between bonds and property yields remain quite high going
forward.
“For that reason we believe that
property allocations require a healthy
dose of caution,” he says.
However, certain individual companies could outperform the sector as a
whole in the medium to long term.
Ramatswi says Hyprop Investments
has niched itself as a dominant retail
player.
The International Data Bank research has revealed that super regional
and regional shopping centres in excess of 50 000 m2 perform well in contracting economic cycles,” she says.
Hyprop has a concentration of such
centres and is expected to perform well
relative to its peers during the trying
economic times forecasted for the next
three years.
Ramatswi says prime retail has attracted better ratings than other retail
types and this should support Hyprop
well into the 2015 financial year.
“New Europe Properties is also one
to look out for. The company has a
longer lease expiry profile and is a rand
hedge,” she says.
Mnguni says Delta Property Fund is
its preferred counter in the sector.
Amongst other factors, the company trades at a significant dividend
yield discount to industry peers and
management recently reiterated its
2015 distribution growth target of
14% to 15%, he says.
Mnguni says Delta is also trading
on a forward yield of 10% notwithstanding a small financial drag coming
through from Delta International. ▲
Benguela Global Fund
Managers’ Zwelakhe Mnguni says property has
delivered a capital gain
of 8.3% in the year to
date, equities 4.2%, while
bonds are down 3%.
NOVEMBER 2014 – PROPERTY MOGUL ISSUE 2 7