Sesfikile Capital (Pty) Ltd
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W: www.sesfikilecapital.com
Monthly Property Sector Commentary – June 2013
Correction or trend…
The South African Listed Property Sector suffered its biggest monthly drawdown since the global financial crisis
where it gave back 11.2% in January 2008; last month wasn’t much better with the sector recording a negative
total return of 11.1%. May started off in a similar vein to recent months, with prices driving upwards and
th
onwards; in fact by the 20 of May the market was up 3.2%. But then a string of poor economic data points
were released; globally the US treasury hinted at curbing further market stimulus sooner than the market was
anticipating, thus pushing global bond yields higher; while locally a poorly managed economy came to light via
weak current account data and a dismal trade balance which put significant pressure on both the currency and
accompanying bond yields. It was a barage of bad news weighing down on bonds, causing yields to spike; and
one thing we have continually highlighted in prior commentaries is that the biggest short-term driver of
property prices is the long bond, as can be seen in Chart 1 below. The last five years has seen a sustained
compression in yields assisting property prices, which has been part, but most certainly not all of the success
story of the asset class over this period.
Chart 1: SA listed property capital returns vs. SA 10-year bond yield
600
11.0
10.5
550
10.0
500
9.5
450
9.0
8.5
400
Recent yield
spike pulling
prices lower
8.0
350
7.5
2012 yield compression
pushing prices higher
7.0
300
250
6.5
6.0
Jan 2008
200
Jan 2009
Jan 2010
10 Year Bond Yield
Jan 2011
Jan 2012
Jan 2013
Listed Property Capital Returns
Source: I-Net Bridge
The 10-year bond started the month at a yield of 6.3%, bottomed at 6.1% and finished the month at 7.2%. You
may ask why a 0.9% move caused such a material move in pricing; well it is actually quite material with rates at
historic lows, 0.9% was a 14.3% move from the starting point. We are in an environment where global rates,
(including our own) have been compressed materially in order to stimulate much needed growth. The question
that must be raised is if and most likely when these rates will normalise. The average rate over the last ten
years is 8.4% - see Chart 2, which is also lower than the decades preceding it. And this is why at the beginning
of the year we were of the view that bonds would weaken gradually through the year, but not revert
completely as this would inhibit growth and cause too big a differential to foreign rates.
Sesfikile Capital (Pty) Ltd
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Chart 2: SA 10-year bond yield
11.0
10.5
10.0
9.5
9.0
8.5
8.0
7.5
7.0
6.5
6.0
Jul 2003
Jul 2004
Jul 2005
Jul 2006
Jul 2007
Jul 2008
Jul 2009
Jul 2010
Jul 2011
Jul 2012
Source: I-Net Bridge
The short-term risk is that rates may continue to push out, which would hurt capital prices, however, it would
have less of an effect on earnings growth. In fact as you move out (the longer your investment horizon), the
less of an impact rates have and the more important earnings growth becomes. Below we illustrate a 10-year
Internal Rate of Return (IRR) for the sector with two key assumptions; firstly an annual growth rate of 7%,
which is not very demanding in light of historic growth rates and current rental inflation/escalations, and
secondly an exit yield of 10%. We mentioned above that the 10-year bond yield is currently 7.2% and the ten
year average has been 8.4%, so the 10% we have is quite conservative. With these assumptions, the ten year
IRR is still at 12% and very interestingly offering a risk premium of 4.8% above government debt, quite a wide
margin of safety considering the defensive nature of property earnings. And if you compare this to the peak of
the market in November 2007, you can see that the market has been far more expensive; not only was the
market offering a lower yield in property, the bond yields were a percent higher at the time and the implied
“risk premium” was only 2%. So while we are very much aware of the short-term impact on prices, should the
bonds weaken further, there is still a strong case to hold property as an investment, which means for an
appropriate term.
Table 1: Listed property IRR over 10 years
Current
Nov 07
diff.
Listed property initial yield
7.30%
6.80%
0.50%
Income grow th p.a. (10y)
7.00%
7.00%
Exit yield (year 10)
10.00%
10.00%
IRR
12.00%
10.20%
1.80%
10y bond yield
7.20%
8.20%
-1.00%
Yield differential
4.80%
2.00%
2.80%
Source: Sesfikile Analysis
Sesfikile Capital (Pty) Ltd
E:[email protected]
W: www.sesfikilecapital.com
Recent results
Three funds reported results during May, we provide a brief summary of the results below.
Company Name
Distribution
(cents)
Growth
7.0%
5.4%
We can no longer refer to Laurence Rapp as the new CEO as his tenure is well under way; but he
is still showing signs of the energy he had at day one. Over the last year he has grown the fund
by 26%, upping the quality of the portfolio, successfully raising R1.57 billion of debt and R1.60
billion of equity. Operationally steady with like-for-like growth of 8%, while vacancies were
slightly higher than last year moving to 6.8%. Looking ahead, we believe the total growth figure
will lag the market as a result of an inflated base from non-recurring revenue items as well as a
slight dilution as a result of enhancing the portfolio. While management is guiding growth to
range between 4% and 6% in 2014 (which is acceptable), we are looking for a potential once-off
rebasing in 2015.
6.0%
The earnings were a little shy of our expectations, owing to cash drag resulting from delays in
asset transfers, but still acceptable in light of the improvements made to the portfolio. This has
been one of the success stories of the ‘new listings’, where management have largely delivered
on what they told the market on listing. They have traded the portfolio exceptionally with a
string of well-priced acquisitions and refurbishments and traded out of a lot of sub-par buildings
they inherited on listing. Their portfolio looks in considerably better shape than it did almost two
years ago on listing. Vacancies compressed slightly from 10.4% to 9.8%, and the market has been
challenging, but they have managed to stabilise like for like earnings in a market that is getting
operationally tougher. Looking ahead, they are guiding 6.5%-7.5%, where we believe they should
reach the upper end of the spread, primarily supported by the impact of recent acquisitions.
Redefine
(RDF)
33.7
(interim results)
Vukile
(VKE)
131.6
(final results)
Dipula
(DIA/DIB)
(interim results)
71.47
Comment
Redefine appears to be in the last stages of their facelift, achieving significant progress to date.
The last six months were characteristically busy as they traded up the quality curve, but the most
publicised event was the tussle for Fountainhead. They managed to shrug off Growthpoint’s play
on the Fountainhead assets; however they were still left with second prize as they still only sit
with 46% of the company. Core operations were mixed; vacancies pushed higher from 5.6% to
6.9% on the back of two leases totalling 37,000m²; however the renewal rate was impressive at
82% and costs were well managed reflected in core property margins which increased to 76.7%.
Looking ahead, we are happy that the base of once-off earnings has been eroded and some of
the dilution from upping the quality of the fund is already in the numbers. Redefine should be
able to generate growth at least in line with the sector and deserves a relative re-rating.
Looking ahead
Short-term volatility will likely persist, and there will likely be pricing pressure should bond yields weaken
further; however, the medium to long term case for property is still very much intact and an allocation of listed
property to one’s portfolio has its merits. We still view this volatility as a chance to buy better / higher yielding
assets should prices come under further pressure.
Date: 06 June 2013
Evan Jankelowitz
Mohamed Kalla
Kundayi Munzara
Sesfikile Capital (Pty) Ltd
E:[email protected]
W: www.sesfikilecapital.com
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