PROPERTY SECTOR THOUGHTS
Author: Ryan Cloete
Globally, the property sector is seeing some interesting dynamics at play. Political and economic uncertainty are driving market volatility. While this brings uncertainty to the market, it also creates some interesting investment opportunities for investors to explore.
Very simply put, when we assess property stocks, we try to group our considerations into two major buckets: operational and valuation considerations.
From an operational aspect, in order to grow shareholder return, the company needs to grow distributable earnings ahead of inflation to provide investors with a real return. This can be achieved through multiple activities such as capital refinancing, developments and redevelopments. However, in its purest form, distributable earnings growth is achieved by growing underlying rental income. As such, we try to identify companies that are able to sustainably grow their rental income over time, thereby growing distributable earnings, and with it, total shareholder return (TSR).
So what do these companies look like? They are usually companies holding high quality, defensive assets, being managed by a forward-thinking management team who have specialised industry knowledge and experience. The difficulty arises in that these companies usually trade at premiums, or perceived premiums, to their peers. This often scares off investors as they believe the premium is unjustified. However, if we look at the historical performance of the SA Listed Property Sector (SAPY), we note the following 2 observations:
1. The sector delivered a TSR of 8% in 2015.
While this was a solid performance, relative to equities TSR, we notice that within the SAPY, there were some clear winners and losers. The chart below illustrates this and highlights the ever increasing importance of stock selection within the sector:
Click on chart to enlarge:
So which stocks were the winners in 2015? Read more