Any clothing sale has to be my worst nightmare. Aside from the fact that they never have stock of the size items I like, the most frustrating aspect of these sales is the fact that winter sales usually happen towards the end of winter, and summer sales usually happen around the time you start looking for something warm to wear. Without knowing it, my daughter gave me the idea for this week’s article when she cleverly pointed out that she uses these sales to buy clothes at discounted prices, even if it means that she would have to wait for the next appropriate season to wear them.
Local property shares (Index J253) managed to grow by 15% per year between the beginning of 2008 and the end of 2017. What makes this figure really remarkable, is the fact that this period included one of the greatest corrections of all time (2008) and more importantly, that it managed to outperform local shares (FTSE/JSE All Share Index) by nearly 5% per year over the same period. Just like the price of summer wear at the beginning of summer, towards the end of 2017, these prices finally started to trade at levels where finding bargains became less and less likely. Mix together the inflated share price levels with the fact that a dark cloud started to appear over one of the index’s largest companies, Resilient (and its sister companies Greenbay, Fortress and Nepi Rockcastle), and you have a recipe for disaster to such an extent that the FTSE/JSE Listed Property Index (SAPY) was already down by 21% for 2018 as at 19 June 2018.
When we compare this to the other four main asset classes (local shares, local money market, local bonds and offshore investments (consisting of 60% shares and 40% bonds)) to determine its relative value, it becomes clear that SAPY hasn’t traded anywhere close to discounted levels since 2013. These five asset classes each have a historical return figure and by comparing these figures to one another, it gives us a good indication of just how cheap or expensive they are trading relative to one another. When we take a look at property shares, for example, we learn that this index’s average dividend yield (which does not consist entirely of dividends alone) has been trading at a historic average of 104% (1.04 times) that of the other four asset classes’ returns (money market, local shares, local bonds and offshore investments) over the last 15 years.
By the end of 2017, this ratio declined to just below 80%, which effectively pointed out that relative to the other four asset classes, it offered less value in terms of prices at the time. Although those prices couldn’t be considered as historically absurd, red lights were starting to flash.
The most recent data shows that this ratio has now increased to 130%, which is considerably higher that the historical average of 104%, but also one standard deviation higher than the 15-year average – a sign that there may be something wrong with local property shares that we haven’t yet managed to put our fingers on, or that an opportunity is starting to present itself to investors.
We took things one step further by also investigating individual property shares. First, we looked at what their underlying fair value should be relative to that of long bonds in South Africa. We then looked at what their fair value should be when we place their long-term average relative to its current price-to-book ratio. Finally, we looked at all South African analysts’ consensus price forecasts (according to Thomson Reuters). These ratios and values all showed us that property shares are gradually starting to enter a bargain phase.
SAPY makes up about 6% of the total FTSE/JSE All Share Index, and Growthpoint (largest) and Redefine (second largest) make up about 2% of that 6%. At an average discount of approximately 15% compared to these two companies’ fair value, I do feel that investors can slowly but surely start to accumulate these shares in cases where their portfolios are still underweight.
It’s crucial for investors to note, however, that much like my daughter’s bargain-hunting strategy, they may have to wait a season or two before their purchases get back into style. As they say after all, “good things come to those who wait”.
The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice in any way whatsoever. This is intended as general information only, and does not form part of any financial, tax, legal or investment-related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained herein. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.