Listed property: Going increasingly global

The JSE’s property sector has grown significantly over the past 10 years and has firmly established itself as a separate asset class on its own.

The market cap of the SA listed property index (Sapy) increased from around R78bn at the end of June 2007 to around R363bn at the end of June 2017 — listed property’s weighting in the shareholder weighted (Swix) all share index simultaneously rose from 3.7% to 7.7% over the same period.

The growth in the sector over the past decade can be attributed to the outperformance of listed property, relative to equities and bonds, both on an absolute and risk-adjusted basis.

This has led to further interest in, and investment into, property.

Real estate investment trust (Reit) legislation, which was introduced in 2013, has further enhanced the appeal of property stocks, specifically to international investors as it is a structure that is widely accepted and understood globally.

Since 2010, noticeable trends in the SA listed property sector include a marked increase in offshore exposure that coincided with significant growth in equity raised — estimated to be in excess of R250bn over this period — which was partially utilised to fund the international expansion of a number of local property companies including the Resilient stable through Rockcastle; New Europe Property Investments (Nepi) and Greenbay Properties; Growthpoint Properties; Redefine Properties; Attacq; Hyprop Investments; and Investec Property Fund among others.

The sector has also continued its focus on improving the quality of underlying, direct property portfolios in SA.

A decade ago, the only way investors on the JSE could gain offshore property exposure was via Liberty International (now Intu Properties and Capital & Counties Properties), which had exposure exclusively to the UK property market.

Today, the SA listed property sector has around 40% offshore property exposure (by value) and investors on the JSE can invest in offshore property, either directly or indirectly, through more than 15 individual companies.

Additionally, investors on the JSE are now able to gain exposure to the following offshore real estate markets listed here:

Germany through Redefine via Redefine International, Redefine International, MAS Real Estate Plc and Sirius Real Estate; Romania through Resilient and Fortress via Nepi Rockcastle; Growthpoint via Globalworth; Australia through Growthpoint via Growthpoint Australia, Redefine via Cromwell; Investec Property Fund via Investec Australia and Investec Australia; Poland through Fortress and Resilient via Nepi Rockcastle, Redefine via Echo Polska Properties and Echo Polska Properties; Western Europe through Hammerson; the UK through Intu, Capital & Counties and Hammerson; Serbia, Slovakia, Croatia through Tower Property Fund, Nepi Rockcastle and Hyprop; sub-Saharan Africa through Mara Delta — and more recently to Portugal and Spain through Greenbay, Resilient and Vukile respectively.

In terms of total returns, listed property has underperformed bonds, cash and equities over the first half of 2017.

Over the 12 months ending June, listed property was slightly ahead of equities but again delivered a lower total return than bonds and cash.

For the first half 2017, the Sapy delivered 2.29% versus bonds at 3.99%, cash at 3.72% and equities at 3.37%.

Over 12 months, listed property delivered 2.83% compared to 7.93% for bonds and 7.63% for cash.

A possible explanation for the underperformance of listed property over these periods is downward pressure on market rents in SA coupled with a strengthening or stabilising rand/US$ exchange rate — a high proportion of earnings are now offshore and the strengthening rand versus the dollar has led to a marginal downward revision in the distribution growth outlook for the sector.

Listed property has, however, been the best performing asset class by some margin over a five, 10 and 15-year period.

Listed property provides a reasonably predictable and resilient income stream at an attractive initial yield, relative to other asset classes, which has the potential to grow over time due to the contractual escalations embedded in property leases.

Additionally — and perhaps most importantly — it has been demonstrated that listed property has the potential to provide substantial diversification benefits over time when added to a balanced portfolio.

• Smith: head of research, Anchor Stockbrokers