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Listed property sector bounces back

14 June 2013 Ian Anderson, Grindrod Asset Management

South Africa’s listed property sector bounced back during the week ending 7 June 2013, despite a further increase in long bond yields.

The sector gained 4.4% (equivalent to a 27 basis points reduction in yield), while the yield on the R186 bond, maturing in 2026, rose by 36 basis points. As a result of this disconnect between the bond and listed property markets last week, the listed property sector is now trading at a significant premium to the bond market.

Although property fundamentals have not deteriorated to any meaningful degree, the current level of distribution growth being forecast over the next two to three years does not support this premium. Consequently, the listed property sector is likely to underperform the bond market in the short term and this level of underperformance may increase if property fundamentals deteriorate in the face of a slowdown in retail sales, slower global growth and an increase in corporate failures in South Africa.

There was little in the way of company news for investors to get excited about. Fountainhead Property Trust Management announced the appointment of Marc Wainer, David Rice and Andrew Konig as executive directors from their current positions as non-executive directors. All three are executives of Redefine Properties, the owner of Fountainhead Property Trust Management and the largest shareholder in Fountainhead Property Trust.

Delta Property Fund announced the acquisition of SARS Bellville for R185 million. According to management, the acquisition represents an attractive investment that will enhance the overall quality and value of the portfolio and is in line with the company’s strategy around SARS.

Ascension Properties announced the acquisition of properties in Mpumalanga for a total consideration of R134.5 million. The acquisition yield of 10.3% means the properties will be both yield and value accretive to the company.

Annuity Properties reported results for the year ended 31 March 2013. According to management, the distribution of 40.91 cents per unit was 1.1% above forecast and the company remains committed to its strategy of focusing on quality properties in the larger metropolitan areas.

Given last week’s price action, there is little or no downside protection for investors in terms of relative value or yield compensation. If bond yields remain elevated or rise further, investors should expect further share price weakness as listed property yields move up and the relationship between bond and property yields is restored.

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