Monthly Archives: November 2016

A closer look at listed property and buy-to-let residential property investments.

The year 2016 has seen volatile financial markets globally with the commodity cycle still in recovery mode, economic growth in many countries still faltering and the roller-coaster political landscape.

Arguably, investors cannot be blameshutterstock_124718629-large-1024x759d for their conservative appetite for risk as finding investment gems is increasingly becoming difficult when the immediate future looks uncertain.

At a time when equities, bond and currency markets are under pressure, market watchers continue to find value in real estate markets during tough times – whether hitching their  wagons to physical properties or listed property stocks.

On the latter, investors would be normally investing in a property company, which owns physical property assets and collects rental income from its tenants that can be distributed as dividends payouts.

“That’s why listed property is much more defensive than any other sector on the JSE,” said Stanlib’s head of listed property funds Keillen Ndlovu at the Liberty Retire Well Masterclass last week.

Although SA’s listed property sector did not initially pique the interest of many investors, who often had a bias toward equities, the sector has since courted a strong following.

Listed property firmly outperformed equities (JSE All Share Index), bonds (ten-year government bond) and cash over the past ten years in terms of total returns. This has since firmly entrenched the asset class as a bellwether.

The sector has also seen a flurry of JSE listings – from having only 20 property companies on the bourse five years ago to 44-odd companies that invest in student accommodation, shopping malls, office, industrial and residential properties.

Ndlovu said the listings have offered investors choice as SA’s property market has opened up to offshore markets, giving investors access to hard-currency earnings.

Underscoring this is figures from Stanlib which reveal that ten years ago the sector had no exposure to offshore markets and so far this year, 37% of earnings derive from markets including the UK, Australia, Central and Eastern Europe. “If you invest in some SA-focused companies, you are also getting exposure to offshore markets,” he explained.

Having listed property in your investment portfolio helps to boost returns. For example, Ndlovu’s figures show that if your portfolio is 60% invested in equities, 30% in bonds and 10% in cash over 15 years – you would have achieved a 13.7% annualised total return.

“If you add 5% of property exposure, you get a total annualised return of 14%. Add another 5%, you get 14.6% and add another 5% you get as much as 15% in total returns. But you have to focus more on the long-term.”

He believes that listed property allocations in an investment portfolio should be 10% to 20%. But this depends on your risk profile.

Despite SA’s worrying state of the economy and the pesky rand, SA’s listed property sector is achieving an average forward yield of 7% and property companies are expected to post inflation-beating dividend growth of 8% average for the next 12 months.

Investment property

Residential buy-to-let properties continue to be beset by humdrum rental growth and property returns that have dimmed the allure of owning a rental property as an investment.

Latest figures from credit bureau Tenant Profile Network (TPN) and FNB show a rise in buy-to-let rental yields since two years ago.

National gross rental yields (before the rental properties’ operating costs such as electricity, water, maintenance, rates and taxes are accounted for) marginally rose to 8.6% in the second quarter of 2016 from 8.5% in the first quarter.

Rental yields are a key metric for a rental property’s return on investment, expressed as rental income over costs associated with the property.

To make matters worse for landlords, the upkeep costs of a rental property continue to rise faster than rental growth, eroding returns.

Finding value in the rental market is fast-becoming area specific.  For example, if landlords are looking for better rental yields, TPN and FNB figures suggest that they might have better luck Johannesburg (9.51%) than in Cape Town (7.71%).

Despite tenants facing the sustained rise in living costs, interest rates, and unemployment, TPN MD Michelle Dickens said the national rental payments trend is still stable.

Dickens said 66% of tenants nationally and across all rental value brackets are paying rent on time and in full; 6% are in the seven-day grace period; 10% are paying their rent partially, and nearly 6% of tenants are not paying rent at all.

The best performing rental value bracket is the R3 000/month to R7 000/month bracket, which makes up 55% of the rental market share.  The below R3 000/month is performing badly due to affordability issues.

“Investment property is still bricks and mortar, and you are still having capital growth albeit it’s not great at the moment. But ultimately it’s about the management of that property,” she added.

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The City of Cape Town is pulling out all the stops to turn around its loss-making World Cup stadium in Green Point.

The City of Cape Town is pulling out all the stops to turn around its loss-making World Cup stadium in Green Point.

A plan to establish a new city-owned entity to manage the stadium was announced at the weekend, shortly after the city council called for comments on its plan to lease space for offices, green_point_stadiumshops, storage and parking bays at the stadium.The plan to allow for businesses to operate on non-game days was mooted two years ago when the city council asked for ideas to turn around the stadium’s fortunes.

Deputy mayor Ian Neilson said the city council wanted to lease out 1000 parking bays and 5005m² of commercial space.

“The basement parking space has been valued at about R1000 per bay per month and R500 per bay for designated retail parking,” Neilson said.

The municipality has already issued a lease for a site near the stadium on Granger Bay Boulevard, which will see construction projects valued at R600-million.

“Such a development will also support the overall commercialisation of the stadium precinct to the benefit of further investment and job creation for the people of Cape Town. The city also wishes to enhance public use of the space,” said Neilson.

The new entity, which will have the city council as its sole shareholder, will have an independent board to run its affairs.

“The municipal entity will be tasked with appointing a specialised service provider whose primary function will be the commercialisation of the stadium to increase its use and financial viability,” said Neilson.

Capetonians have until December 12 to comment on the proposed entity.

Jenny McQueen, Green Point Ratepayers Association chairman, welcomed any plans aimed at making the stadium profitable.

“We actually don’t care what they do with the stadium … as long as they can make it self-supporting and self-paying,” she said.

But she cautioned the city not to sell any more land on Green Point Common under the guise of making the stadium profitable.

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The weak post-Brexit pound has opened a window of opportunity for South Africans to invest in the UK property market.

The rand, which was trading at R16.60 to the pound this past week, has strengtharticles-london_property_prices_749234890ened from R24.50 in January as the fragile pound continues to trade around its lowest levels against the dollar since 1985.
The rand’s strength has been bolstered by pound weakness as well as news that the National Prosecuting Authority has dropped fraud charges against Finance Minister Pravin Gordhan.

The weakness of the pound indicates that South Africa is not alone when it comes to political and economic uncertainty and currency risk. In the US, the hotly contested election is also underpinning investor nervousness and the slowdown in China’s economic growth has caused global ripples of uncertainty.
Despite the pressure on the pound, there are positive investment indicators coming out of the UK. GDP in the third quarter, although muted at 0.5%, was better than expected and the property market’s supply shortfall continues to put upward pressure on prices, which reflects in good increases in the value of property investments in the UK.

The number of mortgages approved in the UK was at a three-month high in September, indicating that the market is picking up again after the Brexit fallout.
“Importantly, interest rates in the UK have been cut from 0.5% to 0.25%, against South Africa’s March increase from 6.75% to 7%,” according to George Radford, Director of Africa of property investment firm IP Global.
“I’m still very optimistic about the UK economy. In fact, a World Bank report recently ranked the UK the seventh best country in the world for ease of doing business, while countries such as Germany and France – which are now courting UK businesses to relocate to their cities – were ranked 17 and 29 respectively. The UK has much less red tape, a friendlier tax environment and is, of course, English speaking.”

“If you look at the property market, it is still structurally undersupplied. It needs 250 000 units per year. Currently 156 000 are delivered, which represents an annual shortfall of almost 100 000 units. This continues to put pressure on house prices.”
Radford recommends investment in regional cities such as UK buy-to-let hotspot Liverpool and financial services hub Manchester – both offering value for money and growth potential – or in zones 3, 4 and 5 in Greater London, which are still largely undersupplied.
In line with the IP Global strategy, he recommends residential property investment over commercial property. “I don’t believe the commercial or office market in the UK will do very well in the next few years, largely because of uncertainty on the back of Brexit. Industrial property however can do much better as the weak pound should assist with exports.”

Residential property is preferable as it is a stable asset which investors can buy directly, whereas access to large industrial or commercial property is limited, unless they invest in a fund, Radford says. “Many of our clients want something tangible – an asset they can have physical ownership of, instead of being one of a thousand investors entering a fund.” Most prefer buy-to-let investments which produce income.
IP Global’s Global Real Estate Outlook showed that London, Manchester, Melbourne, Berlin, Chicago and Tokyo were the most sought after destinations for global real estate investors. Sub-Saharan African investors however have shown a preference for Adelaide, Brisbane, Hamburg and Vienna.
Radford says Southern African investors have shown a preference for the UK and Australia, due to the shared historic connection, followed by Europe and the US.

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Banks tightened standards on commercial real estate loans during the third quarter but left lending practices for commercial and industrial loans virtually unchanged overall.

This is according to a survey of loan officers released on Monday by the U.S Federal Reserve.
For U.S. households, some banks reported easing lending standards on mortgages eligible for purchase by government-sponsored enterprises and some other types of mortgages.
However, consumer loans remained much like the previous quarter.

On Commercial Real Estate, “significant net fractions of banks reported tightening standards for construction and land development loans and loans secured by multifamily residential properties,” the survey said.

The Fed survey covered the third quarter of 2016, and included the responses of 69 domestic banks and 21 U.S. branches and agencies of foreign banks.

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Murray & Roberts and Southern Palace Group today announced the purchase of the Murray & Roberts Southern African Infrastructure & Building (“I&B”) businesses, by a consortium led by the Southern Palace Group of Companies (Proprietary) Limited (“Southern Palace”).

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The fully-funded purchase consideration is R314 million.

Henry Laas, Murray & Roberts Group Chief Executive, comments: “This transaction supports Murray & Robert’s long-term strategy and creates the first major black-owned infrastructure business in South Africa. We are pleased to announce Southern Palace as the new shareholder for the I&B businesses and believe that the transaction is in the best interests of both Murray & Roberts and the I&B businesses.”

I&B is a leading infrastructure and building business, comprising eight divisions: (i) Murray & Roberts Buildings (Gauteng), (ii) Murray & Roberts Western Cape (iii) Murray & Roberts Infrastructure, (iv) Murray & Roberts Botswana, (v) Murray & Roberts Plant, (vi) Murray & Roberts Developments, (vii) Concor Opencast Mining (viii) Dynamic Concrete Solutions (Proprietary) Limited (Namibia) and (ix) the Murray & Roberts share in the Medupi Civils Joint Venture. Lucas Tseki, Southern Palace Chief Executive Officer, comments: We are delighted to have concluded this transaction which sees us acquiring a strong Southern African asset with vast capabilities and a proud heritage of 114 years. We intend to build upon this impressive track record to the benefit of all of our key stakeholders. “

Southern Palace is a wholly black-owned and managed South African, diversified industrial holding company with interests in numerous well-established businesses. Southern Palace has an established track record of successful investment transactions in the Southern African market.

“This acquisition is a key step in Southern Palace’s strategy of going beyond investment holding into operations. We look forward to partnering with the management team, with whom we intend establishing a long and profitable partnership”, adds Tseki.

This transaction excludes Murray & Roberts’ investment in the Bombela Concession Company, Bombela Civil Joint Venture and Bombela Operating Company, as well as the buildings business in the Middle East, where current projects are expected to be completed by December 2017 and no new projects are being pursued.

“This transaction is about Murray & Roberts exiting a specific market sector. Murray & Roberts remains committed to South Africa and the rest of Africa and will continue to support private and public sector clients in its chosen market sectors. It’s the Group’s vision, by 2025, to be a leading multinational group, which applies its project lifecycle capabilities to optimise client’s fixed capital investment in the global natural resources markets. This transaction allows the Group to focus its business on the oil & gas, metals & minerals, and power & water market sectors, which present long-term sustainable growth potential to the Group”, concludes Laas.

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