property: the opportunities and challenges

Transcription

1 property: the opportunities and challenges Paul Duncan Catalyst Fund Managers Catalyst Fund Managers is an authorised Financial Services Provider No.723

2 review

3 you can t go wrong with property p

4 you can t go wrong with property p SA LISTED PROPERY PERY INDEX - TOTAL TAL RETURN Listed Property Sector has pulled back 33.6% since 7th November

5 you can t go wrong with property p positive real house price growth + 34% y-o-y y Negative real house price growth - 6.3% y-o-y y Nominal y/y % change Real y/y % change -10 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08

6 what has caused the dramatic decline in value -residential prime lending rates from 10.5% to 15.5% since mid 2006 monthly mortgage repayments have grown by 36% over the same period electricity hikes of 27.5% inflation of 10.9% (CPIX) National Credit Act mid 2007 it comes down to affordability

7 what has caused the dramatic decline in value -residential imagine i a guy called Mike in April 2006, Mike decided to buy his first house according to the ABSA House Price Index, the average house costs R790k prime is currently 10.5% and Mike can borrow at prime

8 what has caused the dramatic decline in value -residential the National Credit Act does not exist Mike earns R25k per month and the bank will lend him the R790k which he will service with R8000 per month

9 what has caused the dramatic decline in value -residential It is now June 2008, prime is now 15.5%, 5% and is expected to be 16% in August. Mike s interest on his loan is prime % i.e. 15.5% his bond repayment is now R per month (up 36%) Mike salary has gone up with inflation and he now earns R average value of Mike s house is now R965k (up 22%) he wants to sell at R965k

10 what has caused the dramatic decline in value -residential Steve earns R29k per month and wants to buy his first house the NCA was introduced mid 2007 and Steve has credit card debt, clothing accounts and vehicle finance on his car we assume only 80% (because of NCA) of his salary is available to fund a mortgage payment approx. R8 000p/m

11 what has caused the dramatic decline in value -residential the bank will only loan Steve R580k plus a deposit Steve can only bid Mike R580k (plus available cash) for his house assuming a 6% rental yield, Steve can rent a comparable house for R5000p/m

12 what has caused the dramatic decline in value listed property SA LISTED PROPERY INDEX - TOTAL RETURN Listed Property Sector has pulled back 33.6% since 7th November source: I-Net Data

13 econonomic review: what has caused the dramatic decline in value listed property SA LISTED PROPERTY INDEX - TOTAL RETURN OCTOBER JUNE 2008 Fears about US growth and Sub- Prime impact accelerate 50 bp hike Eskom announces load shedding Bear Stearns collapses Zimbabwe elections 50 bp hike Negative inflation data Electricity and petrol hikes 50 bp hike 7.9% 8.4% 9.0% 9.3% 9.8% 10.6% 11.1% 11.7% 01 October October October November November December December January January February February March March March April April May May June June 2008

14 where are we now: global environment item impact liquidity crisis increased risk aversion US sub-trend growth slower global growth global inflation spending power erosion

15 where are we now: local environment item impact political decreased local and global investor confidence Eskom slower local growth - rand local inflation higher interest rates

16 what s the impact investors are nervous Mr Mboweni s actions to curb inflation has made cash a lot more attractive and debt more costly the result is a flight to safety and a focus on short term capital protection will it be at the expense of long term real returns?

17 what has caused the dramatic decline in value listed property Listed property has pulled back 33.6% since 7 Nov Nov Jun-08 Change cash 10.49% 12.00% 1.51% listed property initial yield 7.03% 11.90% 4.87% Note: Cash: 90 day BA rate Listed Property: Catalyst t Calculated l Initial Yield source: Inet Bridge

18 why has only sa property come under such pressure? index 12 months ended June 2008 SA General Retailers % SA Banks % SA Property % SA Small Cap % SA Bonds % ABSA House Price Index 3.80% SA All Share 9.95% CPI* 11.70% SA Resources 38.77% China Shanghai % US Dow % UK FTSE %

19 how much further are values expected to decline? difficult to forecast, BUT inflation forecast to peak at 11.8% in 3Q08 be back within the 3-6 % target t band in 2010 market pricing in one more 50bp hike in August growth forecast to be 3.5% in 2008 and similar in 2009 if any of these forecasts are worse than expected, the current cycle will be prolonged and commercial and residential prices will not be immune from further declines

20 what is the outlook if and when the property market recovers? residential expect a further slowdown in residential price growth over next 12 to 18 months forecast nominal house price growth of 5 6% in 2008 (negative real growth of approx 4-5%) rental market strengthening as lease demand picks up anecdotal evidence of rental income growth (10% plus) initial rental yields are growing on residential, although node specific

21 what is the outlook if and when the property market recovers? residential residential will take longer to recover real recovery when inflation under control transaction type recovery only when affordability improves and interest rates are cut impact of NCA will slow recovery and speculator is under pressure shares in South Africa Ltd are out of favour vs wildcard World Cup

22 what is the outlook if and when the property market recovers? listed property a lot of the bad news already priced in (33% pullback over last 8 months) listed share market leads the direct market because is real time income yield (11.9%) is attractive relative to cash and higher than bonds income growth forecast to be strong due to constrained supply we currently prefer listed commercial property over residential property

23 listed property as an asset class - what do we know cash income yields are 12% + and likely l to increase if repo rate increases at the next MPC meeting long bond yields to maturity are 9.88% (R157) listed property historic rolled income yield is 9.3% cash and bond yields do not grow, property income yields do grow cash and bonds are lower default risk than property

24 listed property as an asset class - what do we expect long-term required return from property of 14.8% initial listed property yield 10.3% income growth next 5 years approx 10% pa beyond this horizon we model slower more sustainable income growth of approximately 4%

25 income growth still robust Company Reporting Period Annual Distribution Growth Hospitality - A Interim 5.0% Apexhi - A Interim 7.1% Apexhi - B It Interim 71% 7.1% Siyathenga Interim 8.8% ifour Interim 10.2% Pangbourne Interim 10.6% Emira Interim 10.6% Capital Year End 12.8% Growthpoint Interim 13.5% Octodec Interim 14.1% Diversified Interim 14.6% Apexhi Combined Interim 15.0% Premium Year End 16.6% Hospitality - B Interim 18.1% SA Corporate Interim 19.0% Resilient Year End 19.8% Madison Year End 30.0% Monyetla Interim 41.9% Apexhi - C Interim n/a Average * 13.5% Market Capitalization Weighted at March 2008

26 how do property companies grow income revenue contracted annual increases on existing leases ( 9% ) lease the vacant space increase the rents on expiring leases non revenue operating cost savings yield enhancing developments or acquisitions leverage debt funding cost savings (as fixes unwind)

27 industrial income growth still robust industrial vacancy levels 2001:4 2005:4 2006:4 2007:4 Isando 4.0% 1.7% 2.0% 1.4% Jet Park 3.7% 2.3% 3.0% 1.8% Benrose 4.0% 4.5% 1.3% 1.0% Pinetown 3.0% 1.8% 1.0% 1.0% Mount Edgecombe 3.7% 1.0% 1.0% 1.0% Mahogany Ridge 38% 3.8% 15% 1.5% 10% 1.0% 13% 1.3% Montague Gardens 3.3% 3.2% 2.5% 2.0% Epping 50% 5.0% 26% 2.6% 30% 3.0% 21% 2.1% Parow 5.0% 2.8% 3.0% 2.7% source: Rode Report

28 industrial income growth still robust Industrial Rental Feasibility Prime Node - Linbro Park Cost of land per bulk m2 (per Rode) R 1,400 Building cost per m2 (per Davis Langdon) R 4,000 Professional 12% R 648 Total building cost per m2 R 6,048 Required initial yield 11% Required monthly gross rental per m2 R 64 Comparison to Current Gross Rentals per m2: Potential Upside Rode (Q42007) m2 warehouse Linbro Park R % Growthpoint (as at FYE 2007) R % Pangbourne (as at Interim 2008) R %

29 office income growth still robust median A' grade vacancy % Q4 decentralised Sandton 12.30% 13.70% 14.80% 11.60% 8.10% 5.80% 2.70% Claremont 22.80% 28.00% 32.00% 5.60% 5.60% 1.10% 1.20% median A' grade gross rentals decentralised Q Sandton Claremont source: SAPOA

30 office income growth still robust A-Grade Node - Sandton Cost of land per bulk m2 (per Rode) R ,137 Building cost per m2 (per Davis Langdon) R 8,000 Professional 12% R 1,336 Total building cost per m2 R 12,473 Required initial yield 11% Required monthly gross rental per m2 R 137 Comparison to Current Gross Rentals: Potential Upside SAPOA A-Grade Median (Sandton) R % Acucap (as at FYE 2008) R % Sycom (as at FYE 2007) R % Growthpoint (as at FYE2007) R %

31 retail resilience e in quality 1 Retail Income Growth 2 Retail Sales Growth % 5.0% % 8.3% % 8.5% % 12.8% % 10.7% % 13.1% % 10.3% % 15.3% % 12.4% Average 10.1% 10.7% 1 SAPIX/IPD South African Index 2 Percentage Change in Total Retail Trade Sales at Current Prices Statistics SA

32 retail resilience e in quality retail sales growth will slow due the impact of higher interest rates dominant, regional retail centres are the most resilient to a slowdown the most susceptible retail is neighbourhood and lifestyle centres bad debts and vacancies in these second- tier centres will most likely increase funds have increased their provisions for p bad debts over the past 12 months

33 sustainable ab contractual income Pangbourne FY % of portfolio leases expiring at R 25 /m 2 Market viability rental for 'A' grade space R 64/m2 Pangbourne portfolio quality, 50% R 32/m 2 Upside potential of 25% expiring leases 'MARKING TO MARKET' Escalation on 75% of leases 'ABOVE LON G TERM CPI X' 28.00% 9.00% Projected topline rental growth in %

34 listed property has recovered recently SA LISTED PROPERY IN DEX - TOTAL RETURN 21 July October January April July October January April July October January April July October January April July October January April July 2008

35 listed property has recovered recently Listed property has recovered 12.3% since 14 July Jun Jul-08 Change Cash 12.00% 11.95% -0.05% Bond s 10.70% 9.88% % Listed Property Initial Yield 11.90% 10.30% -1.60% Note: Cash: 90 day BA rate Bonds: R157 YTM Listed Property: Catalyst Calculated Initial Yield source: Inet Bridge

36 income + growth listed property vs cash 16% 14% 12% 10% % 10.3% 10.9% 11.3% 10.2%.4% % 13.7% 9.7% 15.1% 8% 6% 4% 2% 0% year 1 year 2 year 3 year 4 year 5 1 year swap rates SA Listed Property Forward Rolled Yield As at 21 July 2008 source: I-Net and Catalyst Calculations

37 return 1-year scenarios forward current distribution yield 1 total return 1 forward yield growth 1 Year yield shift year out return 10.3% 10.0% +0.0% 10.3% +20.3% 10.3 % 10.0% 0% +1.0% 11.3% +10.6% 10.3 % 10.0% +2.0% 12.3% +2.4% 10.3 % 10.0% +3.0% 13.3% -4.5%

38 return 5-year scenarios Current Forward Yield Distribution Growth 5 Year Yield Shift Forward Yield 5 Year Out Total Return 5 Year Annual Compound Return 9.8% 5.0% +2.5% 12.3% +10.2% 9.8% 5.0% +5.0% 14.8% +7.4% 10.3% 10.0% +1.0% 11.3% +16.9% 10.3% 10.0% 0% +0.0% 00% 10.3% +18.5%

39 conclusion

40 volatility in short term, commercial property over residential residential house price growth is expected to slow further in 2008 and 2009 low nominal growth and negative real growth is probable residential income yields improving as rental demand strengthens affordability will only improve when inflation is under control and interest rates are cut, unlikely to happen before 2010

41 listed property over residential, cash and bonds in long term recent performance of listed property driven mainly by macro economic concerns and uncertainty: capital price volatility is likely to be around in the short term but listed property delivering good income growth in excess of inflation exit yield driven by capital market conditions

42 listed property over residential, cash and bonds in long term over the long term income + growth will deliver the total return risks further deterioration in inflation expectations lower than expected income distribution growth

43 questions?

44 you can t go wrong with property p Jun-66 Jun Jun-68 Jun-69 Jun Jun-71 Jun-72 Jun Jun-74 Jun-75 Jun Jun-77 Jun-78 Jun Jun-80 Jun-81 Jun Jun-83 Jun-84 Jun Jun-86 Jun-87 Jun Jun-89 Jun-90 Jun Jun-92 Jun-93 Jun Jun-95 Jun-96 Jun Jun-98 Jun-99 Jun Jun-01 Jun-02 Jun Jun-04 Jun-05 Jun Jun-07 Jun Nominal y/y % change Real y/y % change source: ABSA House Price Index