Analysts warn of a bumpy property ride

Analysts warn of a bumpy property ride

Say the top five performers of 2011 are too expensive.

Analysts have warned of a bumpy ride ahead in the listed property sector but say the asset class remains viable over the long term. The top performers for 2011 were Fortress B, Capco, Sycom, Investec Property Fund and SA Corporate. The bottom five were Capshop, Emira, Dipula, Redefine International and Hospitality B.

Paul Duncan, portfolio manager at Catalyst Fund Managers, says while Fortress B is a company run by an excellent management team, it is unlikely to sustain its outstanding 106% year to date yield. Fortress listed in October 2009 on the main board of the Johannesburg Stock Exchange as a property loan structured stock company. Duncan says the company does carry more risk due to its high levels of gearing. A company with high gearing or high leverage is more vulnerable to downturns in the business cycle as it has to continue servicing its debt regardless of how bad property fundamentals are.

Ian Anderson, the chief investment officer at Grindrod Asset Management, says: “The highly geared nature of the Fortress B units ensured that distribution grew by more than 38% in the six months to end of June 2011 and similar distribution growth is expected over the next two years.” Anderson warns, however, that forecast risk is high and investing in Fortress B is not for the faint hearted. Anderson explains that in a dual unit structure, such as Fortress, the A units always have a preferential right to earnings while B units will receive the balance of the distributions. Simply put, once the income due to the A unit holder has been paid, the B unit holder will be paid the balance.

On the other hand, Duncan says Fortress A is a fairly low risk option and is likely to provide a secure income yield plus 5% per annum income growth. Anderson says on a forward yield of 8.5% Fortress A is no longer offering significant value given the constraints on growth once the economy picks up.

Commenting on Sycom, Duncan said: “I think Sycom is fantastic quality, but the company has traded beyond its fair value and it’s unlikely to generate appetite at these levels. Anderson says Sycom looks expensive and is likely to underperform in the sector in 2012. Sycom consensus view Duncan says Capco, which is UK-based and dual listed on the JSE is expensive and illiquid and will probably not enjoy much institutional support at current trading levels.

Duncan attributed Investec Property Fund’s performance, which was fourth on the ladder to the company’s brand. “Some investors like the brand and probably support it on the back of Investec being involved.”

Anderson says while Emira performed poorly in 2011 and was forecasting a decline in distribution this year, the income yield at just under 10% does offer value despite the tough operating environment and deteriorating portfolio measurements.

He says Hyprop’s long-term track record is amongst the best in the sector but had a tough year in 2011 with another difficult one looming in 2012. He adds, though, that Hyprop remains a core holding in any long term portfolio given the quality of its retail portfolio.

The dismal performance of Hospitality B is due largely to its reliance on income from the operating profits of the hotels in its portfolio. Anderson says: “Unfortunately the hospitality industry is suffering from over-capacity and weak economic growth. Forecast risk is extremely high and the security is not recommended for income dependent investors.” Duncan adds: “When the hotel operating cycle improves, the Bs (B units) will have their day in the sun.”

On the funds in general, Duncan says some of the smaller caps like Vunani are attractive but illiquidity could be problematic. Other funds to keep an eye on are Emira and Fountainhead. He says property has been the best performing asset class over the past five years and while the year ahead is likely to be challenging, over the long term there is still a reasonable expectation of a total return of between 12 and 13%.



Denny Crane

Denny Crane
It's not me ... yet. Denny Crane from the TV series Boston Legal. Click on picture if you're not sure who he is!