Dries du Toit. 18/19 July th PROPERTY THE WARRIOR ASSET CLASS - A HOLISTIC APPROACH. Property Investment Conference

Transcription

1 18/19 July th Property Investment Conference PROPERTY THE WARRIOR ASSET CLASS - A HOLISTIC APPROACH Dries du Toit Independent Investment Consultant dries@ddtc.co.za

2 AGENDA 1. USA and RSA Scenario Outcomes 2. Property, the Warrior Asset Class 3. Property Outlook and Valuation 4. Getting out of the comfort zone

3 My Purpose as an Investment Consultant To create and preserve wealth with financial peace of mind I cannot predict the future, but will rely on my research background lessons from history instincts developed over more than 40 years CEO : Dries du Toit Consulting Disclaimer

4 USA Scenarios (from 2009 to 2013) Great Depression Japanese Stagnation Bernanke Recovery Average Vote 2009 Current Vote 2013 Change 30% 40% 30% 10% 30% 60% -20% -10% +30% Bonds Outperform Equities Bonds Outperform Equities Equities Outperform Bonds Don t fight the Fed and don t fight the Tape!

5 US Best View ( ) 30 Year Bond Bull Market has come to an end. Rest of decade ( ) will be Lost Decade for Bonds Equities will mean revert during this decade (7 12% return p.a.) as opposed to previous Lost Decade ( ) for Equities Property and Equities will outperform Bonds and Cash A Bull Market always climbs a wall of worry Always buy gloom, sell happiness

6 Clem Sunter SA Scenarios (His own view) Premier League Second League Failed State Past Score Current Score 70% 30% 0% 50% 35% 15% At present Clem is most bearish since the 1980 s

7 Dries du Toit SA Scenarios (Based on people voting) Global Miracle African Dream African Nightmare Historical Ave Vote Current Ave Vote 20% 60% 20% 50% 10% 70% 15% 20% Investors are also becoming more bearish

8 The Future SA Scenarios Dries du Toit s Best View Global Global Miracle African dream African nightmare 20% 60% 20% Inflation will peak between 6 and 7% Interest rates will remain in single digits Current account deterioration will improve from here Our credit rating is at risk, but will remain above junk status Land Reform will be handled responsibly with respect to the Constitution

9 Property, down memory lane Years ago at SAPOA Conferences Stan Garrun and myself pushed the following Property Agendas relentlessly at a time when Property has very much fallen out of favour (after a disastrous late 1990 s) a) Property, the Forgotten Asset Class b) Property, the Fourth Asset Class

10 Jan-70 Jan-72 Jan-74 Jan-76 Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 % South African Prime Interest Rate - effect on Property Every decade is Different! 80 s & 90 s 25% s Negative Negative Hugely Positive 0 Next 5 years : sideways / slightly up?

11 Property, the Warrior Asset Class 2. Now in 2013 Property, especially Listed Property, has come of age in line with Direct Property. Property has shown remarkable - strength, tenacity and resilience as an asset class during all weather conditions - stable and growing distributions - portfolio return enhancement, & - risk diversification benefits

12 Dec-80 Dec-82 Dec-84 Dec-86 Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Is it time to diversify overseas? (March 2003) Recommendation A: Buy SA Farms/Property B: Diversify overseas Failed Rubicon speech Not the time to invest overseas! A Time to diversify overseas! B Historically SA invests overseas at the wrong time

13 SA Real House Price vs. Global Players SA UK USA JAPAN Local is lekker, my broer

14 SA Real House Price : 1 January Q 2013 France Italy South Africa Australia 98 Netherlands 165 New Zealand 98 USA 157 UK 90 Germany SA the undisputed winner

15 Total return % pa SA Direct How Property: do the national markets The compare? Best Global Performer How do the national markets compare? How do the national markets compare? SA Prize

16 Cumulative SA Asset Class returns (last 10 yrs) /06/ /06/ ST Prize Listed Property (24.6% p.a.) (16.9% p.a) (9.4% p.a.) (8.1% p.a.) Listed Property Equities Bonds Cash Listed Property beating Equities handsomely

17 Asset Class Performance vs. Inflation over last 10 Yrs June 2004 June 2005 June 2006 June 2007 June 2008 June 2009 June 2010 June 2011 June 2012 June Yr Return 32.4% 52.8% 42.8% 43.0% 11.6% 24.0% 24.1% 21.0% 22.2% 44.5% 21.1% 15.9% 45.5% 23.7% 39.9% 10.6% 17.9% 20.0% 17.5% 13.5% 21.1% 19.2% 9.2% 19.0% 23.5% 23.8% -1.7% 11.5% 9.8% 11.2% 10.3% 15.2% 9.1% 5.1% 16.0% 6.8% 8.3% -1.7% 7.2% 8.6% 10.0% 9.3% 6.4% 8.7% 5.0% 7.3% 4.8% 7.5% -2.7% -16.1% 7.5% 6.0% 5.5% 5.2% 7.8% 1.1% 3.5% 3.9% 6.4% -19.2% -30.8% 4.2% 5.0% 5.5% 5.0% 5.8% SA EQ SA Prop SA Cash SA Bonds For. EQ SA CPI

18 Other Virtues of Property a) Property is a Real Asset over Time (The Cap. Rate is a Real Rate) b) Property is the only asset class with both high income and growth (ideal to match the lifestyle needs of pensioners) c) Property behaves differently from other asset classes (correlates well with bonds with an equity cherry on top d) Good geographical spread can be obtained (diversification) e) Performs well under stable interest rate conditions and periods of declining inflation and interest rates (strongly rising interest rates are the greatest risk).

19 Listed Property Income Credentials - Stable and growing income - Distributions never showed negative growth in aggregate Distribution growth (%) Property vacancies (%) GDP growth (%) Source: IPD, SAPOA, MacQuarie, Econometrix, STANLIB

20 Other Virtues of Property f) Further listings and corporate action expected g) Introduction of the Reit Legislation from 1 April 2013 (SA 8 th largest Reit Market in the World) (no tax at Reit Level : Good for Pension Funds / RA s) h) Listed Property is a Return Enhancer i) Listed Property is a Risk Diversifier j) Liquidity and Market Cap has improved significantly over 10 yrs

21 Risks (Headwinds) Operating costs rising faster than inflation Rising bond yields Rising short term yields Increased vacancies Land Reform not handled in a responsible and prudent way The consumer under increasing financial pressure because of too much debt (bad for Retail in particular)

22 Valuation of Property The Components of Total Return I + G + R = TR Income Yield (=Cap Rate) Growth (Net Rentals) Rerating (Yield Shift) Total Return per annum

23 Listed Property : Trading at Fair Value The Components of Total Return (%) : Next 5 years + - = Income Yield (=Cap Rate) Growth (Net Rentals) Rerating (Yield Shift) Total Return Per annum Forget about the 20% plus p.a. plus of last decade Forget about the 20% plus p.a. since the start of this decade Expected Range of returns : 8% - 12% p.a. Better than cash and bonds 70 80% of the time

24 Commercial Property : Looking Attractive! The Components of Total Return (%) : Next 5 years + + = Income Yield (=Cap Rate) Growth (Net Rentals) Rerating (Yield Shift) Total Return Per annum Huge opportunities : 1) Buy and hold (for Annuity Income) 2) Sell to Listed Companies (they are hungry!) 3) List your Portfolio (best time has passed) Expected Range of returns : 10% - 14% p.a.

25 Capitalisation Rates : Direct vs.listed Property Decentralized Offices Attractive 9.50% BEST VALUE! Industrial Leasebacks Attractive 9.00% Shopping Centres Attractive 8.00% 10 year Bond Fair Value 7.60% Listed Property Fair Value 7.50% Inflation Target 3 6% 5.90% Repo Rate Negative in real terms 5.00% 10 year ILB Fair Value 1.60% (R197)

26 Income Yields : Property vs. Bonds vs. Cash vs. ILB & Inflation Linked Bond Dec Dec-02 Apr-03 Jun 03 Aug-03 Dec Dec-03 Apr-04 Jun 04 Aug-04 Dec-04 Dec 04 Apr-05 Jun Aug-05 Dec-05 Dec 05 Apr-06 Jun Aug-06 Dec-06 Dec Apr Aug-07 Jun 07 Dec-07 Dec Apr Aug-08 Jun 08 Dec-08 Dec Apr Aug-09 Jun 09 Dec-09 Dec Apr Aug-10 Jun 10 Dec-10 Apr-11 Dec 10 Aug-11 Jun Dec-11 Apr-12 Dec Aug Jun Dec Apr-13 Dec 12 Jun R202 ILB SA Listed Property One Year Forward Yield SA Gov 10 Yr Nominal Bond SA Cash Rates SA Gov Long Dated ILB

27 FNB House Price Index (% change) 1 July 2013 Once in a lifetime (30%+ p.a.)

28 10-Year FNB House Price Performance 1 July 2013 Future Outlook? Relatively stable in real terms! Like all previous decades (except )

29 Real American Home Values Irrational Exuberance WW s Boom 1980 s Boom Back to Fair value s 50 s 60 s 70 s 80 s 90 s 00 s 10 s 20 s 0 Back to the Fair Value. Best buying opportunity in years.

30 Reasons why US Property has bottomed (2011) The 30 yr Mortgage Rate at all time low Property Markets fell more than 30% in real terms (best value in 30 years) Housing Starts starting to recover Housing affordability at all time high Only Investment Professionals got it right, not Professors Buy gloom, sell happiness

31 Two wise men (in 2011)! If practical to do so, I would buy a couple of thousand family homes as the market looks ripe for recovery Investment Guru, Warren Buffet Now is the greatest time, maybe ever, maybe in history, to buy a house in the USA Property Billionaire, Donald Trump There is no substitute for wisdom!

32 S&P / Case-Shiller Home Price Indices WOW! 29 Jul 2011 R/S =

33 Dec-80 Dec-82 Dec-84 Dec-86 Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Is it time to diversify overseas? (29 July 2011) Recommendation A: Buy SA Farms/Property B: Diversify overseas Not the time to invest overseas! A B Failed Rubicon speech Time to diversify overseas! Historically SA invests overseas at the wrong time

34 Cumulative Returns : 01 Aug 2011 to 30 Jun 2013 Since Conference 2 yrs ago Stanlib Global Property Feeder 67% Catalyst Global Real Estate 65% Foreign Equity Average 63% Grindrod Global Property Income 61% Prudential Enh. SA Property Tracker 51% SA Equity Average 28% 0% 10% 20% 30% 40% 50% 60% 70% 80% Property outperforming Equities : SA and Overseas

35 Conclusions : Property Next 5 years / decade 1. Lower your expectations for this decade. Do not extrapolate from the previous decade 2. The average return for the next 5 years / decade ( 8-12% p.a. : Listed Property) (10-14% p.a. : Direct Commercial Property) is expected to be substantially lower than in the 2000 s 3. Property is still expected to outperform Bonds and Cash 70-80% + of the time 4. Property is a very good risk diversifier and return enhancer Balanced Portfolios Asset Managers should take note

36 Conclusions continued 5. The greatest future investor demand will be for a) Direct Property (best returns) b) Listed Property (tax free returns in Pension Funds) c) Distressed Property (Auctions) 6. Increase exposure to Overseas Property 7. Property has unique virtues, characteristics and universal appeal

37 Conclusions continued 8. Property is the best asset class to match the lifestyle needs of Pensioners (beter than a Traditional Guaranteed Life Annuity) 9. Best place to house Listed Property is in a Pension Fund / Retirement Annuity and Preservation Fund (no income tax, dividend tax, capital gains tax and estate tax). Maximum of 25% in Property according to Regulation 28

38 Conclusions continued 10. In an Illa (Investment Linked Living Annuity) there is no maximum for Property Investments with all the same tax benefits in Par. 8. Only the Income withdrawal is taxed at marginal rates 11. In future Listed Property may very well trade at a Cap Rate below the 10 year Generic Bond (if Property Rights are respected under the Constitution)

39 Pension Fund Property Exposure : AFLMW (Alexander Forbes Large Manager Watch) (30 Junie 2013) Equities Property Bonds Cash etc. Overseas 3% 12% 12% 27% 46% TA Forecast In the next 5 years the Property exposure will rise to 5 10% Listed Property 3% : Too low by far!

40 Out of the Comfort Zone Vision for Africa : To have Cape Town linked to Cairo by Rail Road - Cecil John Rhodes Cecil John Rhodes 100 Years later : connected the Airways!

41 Out of the Comfort Zone By 2020 South African Banks Insurers Property Developers Retailers Construction Companies Agri-businesses Will have make inroads into Africa! If not, Nigeria will replace SA in BRICS Whitey Basson Africa is not for sissies

42 Words of Wisdom We are the change that we seek The time for Africa is here Barack Obama

43 Words of Wisdom Nelson Mandela HAPPY BIRTHDAY th July 2013 We must use time wisely and forever realise that the time is always right to do the righ thing - Nelson Mandela Happy Birthday, Madiba!

44 Final Take Away Don t wait to buy Real Estate Buy Real Estate and wait - Anonymous

45 THANK YOU DANKIE ENKOSI