The listed property sector remains heavily influenced

The listed property sector remains heavily influenced by the underlying movement in bond yields with the strong relationship between the two asset classes persisting through the underlying volatility in yields and lack of direction from the direct property market. Ongoing concerns over both US and global growth, coupled with continuing concerns regarding European debt, keep bond yields low as a flight to safety continues despite the upward trend in inflation. It seems that the sector continues to trade on yield momentum rather than the underlying property market fundamentals. With relatively disappointing recent results announcement and cautious to negative forward guidance from management teams, it lets one to believe that investors in search of yield along with foreigners continue to drive the sector forward.

Current trends being noticed include:   

• Weaker portfolios remain under pressure across all three sub-sectors
• From a sector point of view select industrial is the strongest, then retail and followed by office
• Sector weighted average vacancy has been coming down and at 6.5% is still below the historical average of 7.7%
  • This has come at the expense of operating cost ratios with higher broker commissions and tenant installations being offered to attract tenants
  • Operating cost ratios are also increasing due to higher repair and maintenance spend to ensure that tenants will actually renew leases – many leases have moved to rolling monthly or 12-monthly
  • Landlords still recoup most electricity costs and between 60% and 80% of rates and taxes, but it is putting pressure on reversions
• Companies are all diversifying away from bank funding and are investigating short or medium-term paper funding alternatives
• Funding margins remain under pressure although many are attempting to utilize the current low rates to either refinance or fix interest rates

We will in likelihood continue to see a polarization within the listed property sector with the overall sector performance not necessarily driven by fundamentals. Yield momentum support should remain in the sector with dovish comments from the most recent MPC meetings pointing to a potential likelihood of an interest rate cut should growth concerns outweigh inflation concerns. Property market fundamentals remain weak, but this seems not to be a factor in the current sector trading trends.  

Anton de Goede

Coronation Fund Managers

Tel: 216 802 067

Email: AdeGoede@coronation.co.za