Markets & Equities

Are there opportunities hiding in local listed property shares?

I have made reference to the phrase, “swimming upstream” before, and mentioned how it always reminds me of the joke about the man who was travelling on the N1-highway when he got a phone call from his panicked wife. She had heard on the radio that on the same highway, a vehicle was travelling in the wrong direction, causing havoc with oncoming traffic. Frustrated, the man answered his wife that it wasn’t just one vehicle travelling in the wrong direction, but all of them!

When we take a look at South African listed property shares, one-way traffic definitely comes to mind, and not in an investor-friendly way. Investors had to watch this sector decline by 27% since the beginning of 2018 (between 31 December 2017 and 4 February 2020). Some of the main reasons for this decline can be attributed to:

  • A total collapse of the South African economy over the same period. SA GDP growth shrunk from 3% to nearly zero between 2014 and 2019, and this placed massive pressure on local companies’ growth. Most of them had no choice but to implement cost cutting, which in turn, placed pressure on (amongst other things) property rentals.

  • We also shouldn’t lose sight of the fact that this very sector came from a place of inflated pricing. Over the past 20-year period, the FTSE/JSE SA Listed Property Index (SAPY) delivered an average of 1.5% better returns when compared to the SA All Bond Index (ALBI). The reason for this is simply because there is a greater potential for capital growth in an investment in properties than an investment in bonds. This difference in income, however, has grown to upwards of 4% up until the end of 2015, which clearly shows us the scope of this bubble.

Graph 1: Difference between returns from SA All Bond Index (ALBI) and the FTSE/JSE SA Listed Property Index (SAPY) (source: Thomson Reuters and PSG Wealth Old Oak)
  • Ongoing investigations related to certain local listed property companies’ valuation methods created even more pressure around general valuations.

  • Of course, we cannot exclude the local political environment from these reasons. Uncertainty surrounding subjects like land expropriation without compensation has definitely not made life any easier for property investments.

The big question now is whether this reaction over the last two years is an overreaction, or whether it can be justified. You don’t want to rush out and buy, only to realise that like the man on the N1, you are the only one travelling in the opposite direction towards oncoming traffic. We made a few statistical calculations based on this sector and the results were quite surprising:

  • The correlation between the SAPY’s returns (yield) and the SA prime rate over the last 20 years, was an amazing 84.5%. The SAPY’s returns yield also has a correlation of 76.8% with the ALBI’s returns. Such high correlations show us that there is a close relationship between these return rates. Do I expect this correlation to disengage going forward? Definitely not.
Graph 2: Comparative returns between the FTSE/JSE SA Listed Property Index (SAPY), the SA All Bond Index (ALBI) and the South African Prime Rate (source: Thomson Reuters and PSG Wealth Old Oak)
  • When we take a closer look at the decline in local interest rates, you will see that the South African Prime Rate and SAPY returns narrowly declined together. The Reserve Bank announced two interest rate cuts recently, however – one at the end of 2019 and the other at the other one in January 2020. The SAPY has not reacted to these interest rate cuts just yet (see Graph 2). On the contrary, the SAPY declined even further and returns are now trading even higher.

  • It is interesting to note that the SAPY’s returns is now trading higher than ALBI yields for the first time since the beginning of 2004. I’m not saying that history will repeat itself, but there is no denying that the beginning of 2004 was one of the best times to buy into something like the SAPY Index.

  • If the difference between ALBI and SAPY returns normalise from the current negative to the 20-year average of 1.5% higher, there is great upside potential in the SAPY Index of about 29%. Even if you discount this upside potential by half due to current uncertainty in this sector, you’re still looking at around 15%.

I do feel that value is starting to emerge in the local property sector. Were these aggressive declines justified? Absolutely. But is this the time to start buying slowly but surely? I tend to think so…

The opinions expressed in this document are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information 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 document, no responsibility can be taken for actions taken based on the information contained in this newsletter. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.


Schalk Louw
As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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