Property fundamentals still strong, says STANLIB

LISTED property may be reeling from successive interest rate hikes, but long-term prospects remain positive.

That’s the STANLIB message to listed property investors in dire need of encouragement after the category shed nearly 30% of its value between November last year and May 2008.

STANLIB, the country’s top-performing unit trust company, helped to pioneer the growth of the category with the 2002 launch of its flagship fund, the STANLIB Property Income Fund.

At the recent Morningstar Awards, it was feted as the top performing portfolio over the last five years with growth of more than 330%.

Keillen Ndlovu, co-head of STANLIB’s property franchise, notes: “After the recent category slide of 30%, now’s not the best time to sell. Property is a long haul investment and most category supporters are prepared to ride out the inevitable cycles.

“There is some comfort in the strong property fundamentals driven by shortage of zoned land, high building costs, construction sector capacity constraints, vacancies at all-time lows and a power crisis that has resulted in a slower roll-out of new space. All this should help underpin rentals in the long term.”

Some similarities are evident between mid-2008 and mid-2006.

In May 2006, inflation numbers surprised on the upside and listed property’s long up-run hit a wall. A month later the first rate rise in the current cycle occurred and listed property’s slide became a sell-off, falling within weeks by 25%.

The market sensed that interest rates would continue to rise; yet incredibly listed property bounced back as the category had been oversold despite good long-term prospects. By year-end lost ground had been recovered, setting the scene for further gains until the latest setback in November 2007.

However, Ndlovu cautions that a recovery this time around may not be as dramatic.

Predicted distribution growth is not as strong as it was in 2006 and 2007 and the retail segment has now absorbed several interest rate increases, not just one. Two years ago, relatively low interest rates encouraged companies to stick with their growth plans. Today’s higher rates have caused many companies to put expansion on hold.

However, potential for recovery exist in some property sectors and within some property companies … if you know where to look.

Keillen Ndlovu believes in a painstaking, fundamental investigation of a company’s prospects. BusinessMap Foundation provided his initial grounding in bottom-up research. He then gathered additional experience at Standard Bank Properties before becoming a STANLIB analyst.

He took over as co-head of the award-winning listed property franchise after two-and-a-half years helping to manage STANLIB’s property fund range – a period when he tracked the sector’s surprise comeback.

He recalls: “The primary reason for the 2006 recovery was the realisation that the sell-off had been overdone.

“In mid-2008 after somewhat larger category losses we also sense that the sell-off has been somewhat overdone despite distribution growth coming off its peaks. Again we still see potential for long-term sustainable growth in distributions.”

Ndlovu’s job is to identify value. Opportunities often occur at times when good companies are punished along with the bad as stronger companies often rebound dramatically when their income potential becomes clearer. At present, the potential for recovery appears more pronounced at property companies with relatively high industrial and office exposures.

Ndlovu notes: “Ours is a high-conviction portfolio. There are 25 companies in the class, but we look for the prospect of superior performance and typically select only 12 or 13.

“Another of the similarities with 2006 is that retail centres started to feel the brunt of the rate rise. However, just like today, GDP growth continued, ensuring continuing demand for industrial and commercial space – translating into strong rental streams especially for companies with good exposure to the industrial and office market.

“The retail market is still taking the hit, but even at more moderate GDP growth of 2.5% to 3.5% there is continuing demand for quality factory, warehouse and office space.”

STANLIB’s conclusion is that companies with the right mix of properties again have good distribution growth potential. The team forecasts income growth of 11.3% over the next 12 months.

“The income picture appears inflation-positive, which is reassuring for listed property supporters,” says Ndlovu. “Capital growth is difficult to predict especially in a period of uncertain inflation and interest rates, but long-term fundamentals are sound and parallels with the recoveries in 1999* and 2006 are certainly encouraging.”

*after the Asian crisis of 1998 when our interest rates went up to