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Rather bonds than property

It is hard to believe that 15 years ago, the market rated listed property far superior to long bonds, a situation that has since been totally reversed. The question is why?

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The use of Haylett in a low inflation environment

One of the outstanding features of the new South Africa and the ANC-led government is its stable macro-economic policies, with lower inflation being one of the biggest beneficiaries. This begs the question if the Haylett index is still needed since it was implemented with the intention of compensating contractors for cost fluctuations in times of high inflation.

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Institutional property returns set to tumble

The nominal returns of institutional property have been in a secular downswing for the last 20 years, and the expectation is that this year the trend will continue. However, institutional property’s average real total return of 5,2% p.a. for the last 25 years still beats the perform-ance of both long-term gilts and cash.

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Property’s promising performance

The South African government sold the first inflation-indexed long bond in March 2000. Bids ranged from 10% to 5%, and only a small amount of nearly R500 million of the R189 — maturing in 2013 — was allotted at the cut-off price of 6,5%. The second inflation-linked bond, the R197 (maturing in 2023), was issued in May 2001 and initially traded at a yield of about 5,7%.

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Property forecasts for 2001

Way back in 1978, when I started doing my first tentative property forecasts, life was simple. The forecaster could assume, and bank on, an inflation rate of 15% or so. All metropolitan areas and all property types were growing at a similar rate, or so we assumed, because nobody knew better for want of statistics. There was no decaying node, no crime crisis. There were no sharp hikes in municipal taxes or interest rates. Capitalisation rates were pretty stable. Hence the risk of owning property was low and property was still regarded as an inflation hedge by the investment community. And it was cheap to finance property with loan capital.

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Incorrect valuation leads to rates overpay

We are all so engrossed in our daily lives that we far too often miss important milestones in our hectic lives. One such a milestone for Johannesburgers is the fast-approaching deadline to object to the new general valuation appraisal of their properties.

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Prospects for a rerating of listed property

Two years ago, listed property in SA stood at a discount of about 30% to directly-held real estate. This meant that there was a huge difference between the capitalisation rates of directly-held property on the one hand and the forward dividend yield of listed property on the other. Theoretically, by delisting, property companies could have made a windfall profit.

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Property’s promising performance

The South African government recently sold the first inflation-indexed long bond. Bids ranged from 10% to 5%, and only a small amount of nearly R500 million of the R189 – maturing in 2013 – was allotted at the cut-off price of 6,5%.

read more

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Rode & Associates (Pty) Ltd. complies with section 51 of the Promotion of Access to Information Act, no. 2 of 2000. Rode & Genote (Edms.) Bpk. voldoen aan artikel 51 van die Wet op die Bevordering van Toegang tot Inligting, nr. 2 van 2000. BEE certificate (PDF) |