Caution first in property
Mistakes more painful and the risk of overpaying is rising, industry participants warn
Listed property owners and managers are being cautious in domestic and offshore markets, where it is becoming easier to misjudge asset prices.
Investec Property Fund (IPF) says it is best to be cautious in a challenging property market. Locally, property prices are still too high. Internationally, it is easier to overpay than it was three years ago.
"It’s become more difficult to make returns in listed property, here and abroad. You have to find the right country and the right opportunity within that country. That could mean investing in a town, a specialised asset type or in a certain mix of assets," IPF CEO Nick Riley said last week.
"Also, in developed markets mistakes are biting harder. Money isn’t as cheap as it used to be, with interest rates set to rise in various parts of Europe. We are being careful with the timing of our next investments here and abroad," said Riley.
IPF’s assets are worth about R18.8bn. While the company has grown steadily, it has been careful with respect to investing overseas. Domestically, its premium acquisition was a R7.1bn portfolio from private property group Zenprop.
It took the group between six months and a year to digest the deal and an industrial portfolio worth R826m that it bought from Griffin Holdings.
IPF’s stake in Investec Australia Property Fund is worth about R1.3bn. It might invest further in the country in the near future but it was scouting the UK for opportunities, says Riley.
Garreth Elston, a portfolio manager and the head of Golden Section Capital, said the second half of 2017 could prove to be very difficult for listed property companies. He expected the local property market to become more challenging before it improved.
Local sellers had not yet adjusted their expectations to account for the realities on the ground, he said. "In rental terms it is also going to get a lot more difficult for most South African real estate investment trusts to get their forecast rentals. Without a positive catalyst that emerges soon, these companies are arguably heading into a difficult second half of 2017."
There was definitely a risk of overpaying in several of markets in which SA companies operated, said Elston, referring to parts of Eastern Europe where pricing transparency and efficiency were not optimal.
"With growth disappearing in SA, companies definitely need to avoid falling into the trap of overpaying for growth."
A report released on Friday by Catalyst Fund Managers showed that listed property had a disappointing month in June.
The SA Listed Property Index recorded a return of 0.29% for June 2017, with its historic yield ending the month at 6.93%, 11 basis points higher than the 6.82% recorded at the end of the previous month.
In the year to date or for the first half of 2017, listed property achieved a total return of 2.29%, while cash and bonds outdid it with 3.74% and 4.02% total returns, respectively. Equities also outperformed listed property, achieving a 3.37% return, according to the report.