LISTED property stocks have been among the worst performing assets since the trouble started in global markets on May 11 this year. The four most valuable listed property stocks on the JSE have each fallen by more than 20% during the period. That’s much worse than comparable losses posted by other sectors. Gold and resources have fallen by 6% and financial and industrial shares by 10%. May 11 is used as a reference point because that is the date that turmoil in global markets began.
It was the day that the US central bank, the Federal Reserve, not only hiked interest rates again, but also hinted that its tightening cycle could continue. It was also the day that the JSE All Share hit an all-time high of 22 094 points.
The sell-off proves that listed property is not always a haven of peace and tranquillity, as one asset manager has described it. The prices of Growthpoint, Hyprop, ApexHi and Redefine, have tumbled more than 20% each since May 11.
Even taking recent losses into account, listed property has had a phenomenal run over the past few years. At a conference held two weeks ago, First South Securities pointed out that listed property had returned 34% a year for the past seven years. It also warned that this type of return was unlikely to be repeated in the next 12 months.
First South Securities’ analyst Leon Allison says he’s concerned that retail investors are behind the selling. “Retail investors form a bigger portion of listed property assets than other equity sectors,” he adds. “And my concern is that they’re starting to get a fright and selling indiscriminately. So often they get it wrong by buying high and selling low.”
Allison says that listed property “fundamentals” are still in place. Vacancy rates are declining and refinancing benefits are coming through, says Allison. The refinancing benefits arise because listed property stocks have borrowed money on improved terms. The recent interest rate hike actually works to the benefit of listed property companies, says Allison, because most borrow money on fixed terms.
As the prices of listed property stocks have fallen, the expected yields have gone up. Allison says that expected yields that were 7,3% six weeks ago are now 9,3%.
According to consensus forecasts by analysts polled by McGregor BFA, Growthpoint has a forward yield of 7,5%, Hyprop 6,9%, ApexHi 8,8%, Redefine 8,3% and Pangbourne 8,4%.
“About six weeks ago I said the sector was fairly valued to somewhat expensive,” says Allison. “Now I’m saying it’s generally attractive.”
Allison reckons that his institutional clients see buying opportunities in the market, but are forced to continue selling because retail clients are running scared. He’s worried that there has been a transfer of wealth from the uninformed to the shrewd investor.
Like other asset classes, listed property prices often take their cue from the so-called risk-free rate of return, which is the yield earned on government bonds. As the yield on government bonds rises, so too should the yield of riskier assets like property and shares. This translates into a fall in price.
Since May 11, the yield on South African government bonds with a ten-year maturity have risen by 100 basis points from 7,5 to 8,6%. During the period, Reserve Bank Governor Tito Mboweni hiked interest rates by 50 basis points.
The current account deficit and a fast-depreciating rand has sparked chatter that more interest rate hikes are to come, which will put further pressure on the prices of assets like bonds, property and shares.