Moody’s downgrade, labour unrest put pressure on listed property

The downgrading of South Africa’s sovereign credit rating by Moody’s last month, and an escalation in labour unrest, sent bond yields higher, placing pressure on unit prices in the listed property sector.

The performance of listed property tends to track the performance of bonds because they are both income- generating investments.

The local listed-property sector declined by 0.7% in the first week of this month, as international investor sentiment towards South Africa continued to deteriorate in the wake of further labour unrest.

Although a number of the smaller listed property companies continued to register price gains, industry heavyweights such as Growthpoint Properties dropped 0.9%, while Fountainhead slipped 1.1%, Sycom 1.8% and Resilient Property Fund 2.1%.

Grindrod Asset Management’s chief investment officer Ian Anderson said on Thursday that, looking ahead, the listed-property sector would "no doubt take its lead from the bond market, which is expected to come under further pressure as the rand continues to lose significant ground and investor sentiment towards South Africa deteriorates further".

Mr Anderson said the substantially weaker rand may also negate any chances of further interest-rate cuts this year or next.

"Despite these short-term headwinds, the listed property sector remains poised to deliver inflation-beating returns over the next three to five years, on the back of a high initial income yield and above-inflation distribution growth," he said.

In the last year, South African listed property recorded a total return of 37.71%, while bonds recorded 16.99% and cash 5.61%.

According to Catalyst Fund Managers’ report for last month, as far as the international market was concerned, the best-performing listed real-estate market was Asia, excluding Australia, which recorded a net total return of 5.67%. North America recorded the lowest net total return of -1.90%.

Catalyst said in an environment where debt funding was cheap, new property supply was limited and yields on assets were reasonable, there were great opportunities for real-estate companies.
However, the fund manager said there was also the ability to destroy value by taking on too much balance- sheet risk, buying poor-quality assets, overpaying for assets, or issuing equity at the wrong times when trading at discounts to net asset value.

"As a result of this, a lot of emphasis should be placed on management teams and their ability to create or destroy value in the long term," it said.

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