In an interview with Simon Brown from Moneyweb, Daniel King, head of fixed income at Merchant West Investments, offered insights into the current landscape of South Africa's listed property sector.
King's remarks shed light on the complexities and considerations investors face when evaluating opportunities within this market.
Brown began by acknowledging the apparent allure of listed property stocks, particularly given their significant discount to net asset value (NAV) and appealing yields, which in some cases reach as high as 30%.
However, King cautioned against overestimating the attractiveness of these investments when compared to safer alternatives like bonds and bank rates.
King said that investing in real estate investment trusts (Reits) involves more than just acquiring property assets. Investors also assume risks associated with management, lease portfolios, and significant financial leverage within the Reit structure.
He stressed the impotance of thorough analysis to ascertain comparable returns to bond yields.
One key issue King highlighted was the distortion caused by high levels of debt within the Reit sector, with loan-to-value (LTV) ratios hovering around 40%.
Additionally, he pointed out the potential staleness of NAV valuations, which lag behind adjustments to reflect changes in interest rates.
As bond yields rise, King explained, the capitalisation rates on all assets should increase accordingly.
However, this adjustment has been lacking in the South African property sector, contributing to the current discount to NAV.
When considering leverage and market dynamics, King suggested that the perceived discount may actually align with the sector's true value, if not indicating a slight overvaluation.
Brown raised concerns about the sustainability of LTV ratios at 40%, particularly in light of past market peaks and potential impairments to property values.
King stressed the importance of conservative balance sheets, suggesting that a lower LTV ratio, around 30%, would be more prudent in the current economic climate.
While certain property sub-sectors, such as storage and logistics, may exhibit more resilience, King advised investors to exercise caution, especially in office and retail segments facing oversupply challenges.
King's insights underscored the complexities inherent in evaluating investments in South Africa's listed property sector.
Investors seeking returns are once more showing confidence in real estate again, evident in the 27% surge in property stock values since late October, and following a three-year low for the sector, the Financial Mail reported.
In the past year up to January, the South African listed property index (Sapy) notably outpaced the JSE’s top 40 index by an impressive 20% in terms of total returns.
Over the same period, property stocks gained 14%, contrasting with the top 40's decline of -6% - marking the first instance in six years that listed property outperformed general equities.
Mohamed Kalla, executive director at Sesfikile Capital, stated: "An unstoppable rally over the last 2 months pushed SA listed property returns into double-digits, with the ALPI topping the leaderboard as the best performing asset class in SA for 2023."
While apparent discounts and high yields may seem attractive, investors must carefully weigh the associated risks and consider the broader economic landscape before making investment decisions, King said.
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