Market Review

With the listed property sector outperforming most asset classes over the last 10 years, 2017 is proving to be a bit more subdued with the FTSE/JSE SA Listed Property Index (SAPY) returning a total of 5.7% in Q3’17 and 8.2% year to date (YTD). From January 2017, the SAPY has outperformed bonds and cash, but it has meaningfully underperformed the FTSE/JSE All Share Index (Alsi) (12.5%).

The best performing shares in the SAPY for the quarter included shares with a high foreign exposure such as MAS Real Estate, NEPI Rockcastle as well as Greenbay Properties, which only recently entered the SAPY Index. This was driven by good fundamental earnings growth, which was partly driven by rand weakness. Conversely, shares with more pure-play SA exposure were some of the underperformers, such as Hyprop Investments, which derated substantially from well under a 6% dividend yield (DY) to over a 6.5% DY in the course of the quarter.

In terms of recent earnings releases, while cautious on the outlook in South Africa, some of the larger, predominantly SA-focused REITS such as Growthpoint Properties and Hyprop still actually delivered healthy growth in dividends of 6.5% and 13% respectively, with guidances of 6% and 8% for the next year respectively. What Satrix did During the September 2017 FTSE/JSE quarterly index rebalance there were no constituent deletions or additions to the SAPY Index. Shares with the largest weight changes included Resilient (up-weighted) and Growthpoint (down-weighted). The one-way turnover came to 1.8%, which was the lowest in quite some time.

As has become customary in the sector, there were again numerous capital raisings via bookbuilds, which included Equites Property Fund, MAS Real Estate, NEPI Rockcastle, Greenbay Properties and Resilient Property Fund.

Your fund is a full replication tracker and any performance difference relative to the benchmark could be related to cash flows.

Outlook

The SAPY Index is currently trading on a 7.2% clean forward yield, with two-year expected growth in dividends of about 7% p.a. This yield is now a 140 basis points (bps) premium to (i.e. below) the long-bond yield. This spread versus bonds has narrowed from as high as 260 bps in Q1’16, on account of local bonds outperforming the SAPY, with the SAPY derating over that 18-month period from 6.6%, as capital values haven’t really moved to keep pace with dividend growth. The implied average yield of just SA-specific counters is much higher, at 8.5%.

We consider these levels to be marginally cheap on average, in absolute terms, and rather attractive on a relative basis, especially for the long-term investor, when compared to bonds and SA cash.