SA property holds its own in the midst of a global property melt down
South African listed property has performed far better than its offshore peers over the past 12 months. As we show below the Property Loan Stock (PLS) Index of the JSE has maintained its US dollar value of 1 September 2008 while the S&P Reit Index is worth only about half of its year ago value. This even after recovering some of its losses incurred through the global credit crisis that reached its apogee with the collapse of Lehman Bros in mid September 2008.
The relationship between the share price of leading JSE listed property company Growthpoint (GRT) and that of Liberty International (LBT) a leading international property company also listed on the JSE in rands reveals a similar pattern as we also show.
JSE Property (PLS Index) vs US Property S&P Reit Index (1 Sept 2008=100)
Source: Bloomberg and Investec Private Client Securities
Liberty International vs Growthpoint (Sept 1 2008=100)
Source: Bloomberg and Investec Private Client Securities
Explaining this anomaly in a global capital market
The question is how could this be given the integration of global capital markets, as so well demonstrated by the behaviour of equity markets in general? The answer is surely quite simple. JSE Property Loan Stocks (PLS) have continued to grow their distributions by 10% in US dollars while their peers offshore have had to reduce the cash they offer investors drastically by nearly 40%, with further immediate reductions in the wings. (See below)
Cash Distributed in US dollars: JSE Property Loan Stocks vs S&P Reits (Sept 1 2008=100)
Source: Bloomberg and Investec Private Client Securities
LBT vs GRT Cash distributed (SA cents per share)
Source: Bloomberg and Investec Private Client Securities
The absence of foreign shareholders proved a blessing
Such fundamental comparisons in the form of cash distributed to share or unit holders are highly favourable to owners of SA commercial real estate. That foreign shareholding in SA listed property remained unimportant in the year to date and helped protect the JSE PLS from the liquidations forced upon many a hedge fund through the credit crisis. In a liquidity crisis the good and the bad can all be swept out by the tide.
Offshore property is priced for growth
Yet LBT with an historic dividend yield of 1.11% at July month end is priced for a strong recovery in cash distributed if compared to GRT which traded on 24 August at a much higher dividend yield of 8.4%. As we show below JSE listed Property Loan Stocks (PLS) in general (as represented by their respective Indexes) offer significantly higher starting cash yields than do S&P Reits. This again suggests that S&P distributions are expected to grow significantly faster than PLS distributions over the years ahead.
Dividend Yields: S&P Reits Index Vs JSE Property Loan Stock Index
Source: Bloomberg and Investec Private Client Securities
The future of cash to be distributed by PLS will be fundamentally driven
The future of cash distributed by JSE listed PLS will, as has been the case in the past, be determined mostly by trends in rental income that will depend largely on the performance of the SA economy. The weaker SA economy clearly poses a threat to the continued growth in rental income over the next twelve to twenty four months. Yet to date the major tenants of the Property Loan Stock companies, especially the established major retailers who take up a large proportion of the rentable space on offer, do not appear to have lost their appetite for trading space in SA or their ability to meet contractual rental obligations.
So far so very good for listed SA property, even though the recession in SA has been a severe one. Unless the SA recession deepens further and the recovery in global economies and markets, upon which off shore property depends for its recovery, passes the SA economy completely by, the prospect for continued growth in cash distributed by SA listed property over the next 12 months seems a reasonable one.
Growth in distributions from the PLS Index will slow – but positive growth would be impressive in difficult circumstances
Growth in the cash paid out by SA listed property companies is bound to slow down from its current very buoyant rate. However in an environment where many SA economy dependent companies are facing declining earnings and dividend distributions, even a modest improvement in cash distributed by property companies may be well received by the market place. This will be especially so if SA short term interest rates continue to recede and the equity market generally remains ready to look well ahead to an economic recovery to come.