Property – still a relatively low risk asset class?

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By Nic Andrew

Nic Andrew, head of Nedgroup Investments writes that for a long time South African investors have been handsomely rewarded for investing in property and many regarded this as a relatively “risk-less” asset class. The property market has had a poor run and returned negative 20% for the last 12 months, and many investors are now realising the true risks of their investments.

He asked three of its fund manager partners for their opinions on this asset class; whether property valuations are starting to look attractive, and whether it still offers too little reward relative to the other asset classes.

Daniel Malan, speaking on behalf of the Nedgroup Investments Managed Fund stated that their research (both as a stand-alone asset class and in relative terms) points to listed property vehicles offering no value to investors at present. Investors in listed property currently receive a negative real yield compared to a 1% to 2% real yield in cash and money market instruments. Malan said that he did not see any point in accepting price risk in return for a lower yield than a comparatively ‘safe’ asset class.

Representing the Nedgroup Investments Rainmaker and Entrepreneur Funds, Omri Thomas said that property companies were valued relative to the long bond yield. In 2000, property companies were trading at yields substantially higher than the then reigning long bond yield at 12.5%. Subsequently we saw a material reduction in the inflation rate driving the long bond yield to below 8% in 2007; property yields moving to a discount to the long bond yield; healthy distribution growth; and the expansion of property portfolios. All of this resulted in significant capital and income growth for property companies. Since mid 2007 the picture changed dramatically. Inflation continued to surprise on the upside driving bond yields from below 8% to above 10%. This in turn had a negative impact on property valuations impacting the performance of the sector. Going forward decent distribution growth will be offset by continued high inflation, a slowing economy, electricity shortages and a weakening rand. Liquidity in the property companies also remain a concern and, therefore, it looks to be too early to reinvest into the property sector.

The view of William Fraser, speaking on behalf of the Nedgroup Investments Value and Stable Funds, is that yields on listed property shares are closely correlated to the long bond yield. He said yields would probably rise over the short term, meaning some further weakness on the property side. But the distribution growth cycle remained intact, and growth of 10% per annum over the next three years is not out of the question. Over the shorter term cash would probably do better than listed property, but on a three year view, listed property would perform significantly better.

Source: Equinox, July 6, 2008.


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