What's behind property's recent poor performance?

Property prices dropped a massive 8.25% during the last week of May - what is the reason for this?

Property is a hybrid asset class with a high positive correlation to bonds.  This basically means that when bond yields for example rise, property yields will follow suit, although not necessarily to the same degree.  The opposite also holds true, when bonds yields drop, so do property yields.

So during the last week of May foreigners were net sellers of our bonds, to the tune of just over R6bn.  On Thursday, 30 May, foreigners sold a net R5.5bn of our bonds.  To put this into perspective, this was the biggest one day sell-off since September 2011.  This lead to significant bond market weakness and the subsequent jump in long bond yields (R186) from 7.055% to 7.57%.

Due to the high positive correlation between property and bonds, property yields followed suit and rose from 5.81% to 6.34%.  This represented a percentage point jump of 9.21.

So, due to the inverse relationship between property yields and property prices, as can be seen in the graph below, property prices plummeted. 

Property prices dropped a massive 8.25% during the last week of May.  This obviously has a knock on effect on property unit trust funds.  The worst performing property unit trust over the last week of May lost 10.88%. The best performing property fund lost 4.57% and the category average retuned -8.57%.

The SA Listed Property Index has subsequently recovered “some” of the above-mentioned losses.  The index is up 2.63% since 31 May 2013.

* This report was prepared by Melvyn Lloyd, investment analyst, Glacier by Sanlam

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