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Listed property performance despite challenging macro environment
The listed property sector continues to show significant outperformance, despite property funds operating in a challenging environment.
However, this degree of relative outperformance is not sustainable. This is according to Evan Robins, Listed Property Manager for Old Mutual Investment Group’s MacroSolutions boutique, who says that current economic headwinds are likely to dampen but not derail the dividend growth rate produced by listed property companies; and over the long run listed property is still expected to provide a good return.
Robins pointed out that it was only since August that property performed significantly, and this surge was due to the strong performance of the bond market. “From August until end October the SA Listed Property Index (SAPY) provided a 12.4% total return, outperforming general equities in the FTSE/JSE All Share (-2%),” he explains. “This was largely because the bond market was strong during the period, with yields falling. Properties rating to bonds changed little over this period despite good property results.”
“The upswing was also helped by growth in the rentals received and thus the dividends paid by the underlying companies. Many companies released results during the period and these were as good as − or better than − expectations, with average double-digit distribution per unit (DPU) growth and no substantial company growing dividends by less than a margin above inflation. Guidance is for the rate of sector dividend growth to slow, to around 9%.”
However, Robins believes that risk in the sector has been, for the most part, underestimated and unappreciated. “Property prices can be more volatile than many appreciate. From a long term perspective the return outlook remains strong, but the journey could be bumpy. Considering the headwinds that the sector has been facing of a weakened consumer and an embattled economy, fund performance has been excellent, but these headwinds will need to soften if this performance is to continue, especially with regard to the consumer,” he says.
Old Mutual Investment Group Chief Economist, Rian le Roux, painted a marginally upbeat economic picture for the short term, but agreed that over the longer term the outlook is not as encouraging. “After a weak first half of 2014, GDP growth should look notably better in the second half which is expected to be reflected by the Stats SA announcement today, and a rebasing/weighting and new System of National Accounts will see past revisions,” he explained. “Inflation prospects have improved with the sharp fall in the oil price and recent rand stability, although it still remains at risk. Consensus inflation forecasts for 2015 have declined and in the shorter term prospects for the Current Account may also have improved, with the sharp fall in the oil price, car exports at record levels and platinum production recovering.”
“Overall, the outlook for 2015 is still not particularly rosy, in the absence of decided market-friendly reforms, as interest rates have to rise further and fiscal policy will be tightened, but the fall in the oil price and improved inflation outlook reduces the risk of the SARB being forced to tighten policy aggressively.”
He also warned against excessive pessimism as some moderate tailwinds and reforms do exist. “It is important to note that structural headwinds do not prevent cyclical recoveries and there are signs in the economy that all is not lost,” said le Roux. “We are seeing a more competitive rand as well as a more supportive global environment. Moderate re-acceleration in Government’s infrastructure spending and the unblocking of structural constraints (such as electricity and transport), as well as a better functioning public service system and the deleveraging of consumer debt, are all encouraging factors for SA.”