Is greatest-ever property bull market ending?

Cape Town – Over the past ten years there seems to have been a greater correlation between listed properties in South Africa and bonds, according to Dries du Toit, CEO of Dries du Toit Consulting.

At the recent MSCI South Africa Real Estate Investment Conference in Cape Town, Du Toit demonstrated that, as an asset class performance, listed property in the country behaved 70% like bonds and 30% like equities. To him it is very important to remember this.

The last 12 months up to the end of July this year, the yields of 10-year bonds seems to have moved sideways in December 2015, before the Nenegate crisis.

"When 10-year government bond yields spike upwards, property prices tend to fall. Of course one cannot forecast based on the past, but one can learn from it," said Du Toit.  “Every crisis usually presents an opportunity.”

"Property is like a high beta bond. Don’t try to forecast it and don’t sit back and wait for something to happen either."

The next question he posed delegates was whether they think listed property is expensive or not.

READ: SA property market grows to R5.8trn

"It looks horribly expensive, but it is only expensive if you compare like with like – apples with apples. On the face of it, property looks expensive compared to bonds. Some asset managers even have zero exposure to property," said Du Toit.

"To compare like with like one must strip out the companies that were not in the SA listed property index in 2009. There are also some development companies listed on the JSE, like Atterbury, which is a developer, but does not pay a dividend."

He emphasised that since 2009 many SA property companies have diversified overseas. Now the companies in the index are only 60% exposed to SA. Offshore earnings of these companies, therefore, now make up 30% of these SA listed property companies.

"We cannot value the 30% overseas exposure relative to our SA bond yield. We must adjust to compare like with like. Some SA companies have been successfully included in overseas indices. So, they are hybrids and also rated as overseas companies. I say again, we must compare apples with apples," said Du Toit.

That is why, in his view, local SA listed property companies are all valued fairly and not in a bubble.

READ: MSCI unveils new emerging equity index

"It is not a homogeneous sector in SA anymore. Take that into account when making a judgement on a comparison with bond yields," said Du Toit.

"When comparing, take out companies who are listed on the JSE, but really are developers not paying dividends and also take out those with overseas exposure. So, if you compare apples with apples, the SA listed property market is not expensive. And yet many asset managers still have zero exposure to property."

Du Toit did add as an aside that it still remains to be seen what impact the so-called Gordhangate will have on the SA listed property market.

In his view, the probability is 60% to 80% that overall average returns over the next five years will range between 10% and 15% for direct commercial property.

"The bottom line is that SA property has had the greatest bull market in history, but the returns in future will be lower than in the past. We won't see the 10-year returns of 15% to 20%. If we are lucky, it will be between 10% and 15% - and listed property is expected to produce 10% to 12.5% per annum," said Du Toit.

He emphasised that listed in property in SA should become a separate asset class on the JSE.

"Listed property is no longer an alternative asset class or a sub sector of financials," he said and added that he thinks the virtues of unlisted commercial property in SA are too easily forgotten.

"You must be a realist about SA property. When comparing, you should have three indices, one for just SA property companies with or without overseas exposure, another for only overseas exposure and then a total one. Then you will be able to understand the behaviour of SA property.

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