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Muted returns expected for listed property in 2013

Listed property in 2013 is expected to remain an attractive investment option with total returns of around 12 to 13%, according to Catalyst investment manager, Paul Duncan.

The listed property sector recorded returns in excess of 24% for the year to date outperforming all other asset classes on the JSE.

Duncan says based on the past 12 months it’s difficult to see the sector outperforming over the coming year. “If you take a longer-term view, say five years and you are less concerned about the volatility and short-term movement, it’s still attractive. I still believe it will outperform cash and bonds,” Duncan said.

“On a longer-term view it’s not an attractive total return, probably in the region of 12 to 13% based on where we see it now, but it’s probably fairly valued on a risk adjusted basis,” Duncan added.

Warning

He cautioned against new listings saying they carried more risk than established companies: “You have an unknown management team, unknown assets. You have no track record so investors need to be compensated for these unknowns. All things being equal there needs to be an additional premium offered to investors to compensate them for the forecast risk.”

There are both advantages and disadvantages in investing in smaller companies, Duncan says: “They are nimble and have the ability to move the needle, but they are less diversified and illiquid so if something goes wrong, the impact can be more severe. They don’t have the economies of scale that the larger guys have.”

Citing South Africa’s largest listed property company, Growthpoint, with a market cap of almost R44bn, Duncan said if it lost a large tenant in a building the impact is spread across its multi-billion rand portfolio. On the other hand if a R1bn company loses a major tenant the loss is spread over a much smaller base, making the impact more material.

The opposite is obviously beneficial in that a good deal struck by a smaller company means yields spread over a smaller pool of investors.

Facts and figures

Listed property currently has a combined market cap of just under R200bn comprising 26 companies. Within those are six entities with dual structures of A and B, offering investors 32 securities to choose from and getting exposure to listed real estate.

Duncan says over the past five years the total return for property was 13.19% annualised for five years ending October 26. “Equities did 6.5% per annum, cash did 8.5% per annum and bonds 10.09% over that period.”

He added many of the new listings over the past 12 to 18 months were still trading at yields above 9% versus the sector yield of 7% “so there are definitely some options if one is interested in getting exposure within the sector. I think we’re seeing a turn in the retail and industrial sectors of the underlying property market and companies that have got exposure to retail and industrial could provide better distribution growth for the next 12 months than the rest of the sector.”


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