Listed property funds have been toppled from their leading performance position last year by better results from the financial services and retail sectors. But property funds still produced sparkling returns, even better than in 2004.
Forward yields have fallen from an average of 11,49% last year to 9,96% in April this year, according to fund managers Provest.
This is still high for JSE-listed companies, though payouts are on a pretax basis, mainly in the form of interest distribution. That is because of the structure of property loan stock (PLS) companies, which make up most of the sector.
Property's steady income stream and the continuing recovery of the asset class after 30 years of real decline will ensure that payouts grow fast over the next few years, at least.
Low inflation, low interest rates, high optimism and expectations of rising GDP growth will bring continuing demand for new space from users.
Two fund managers with entrepreneurial skills, Madison and City Property, dominated the sector, with five of the 10 performers, most of which gave total returns of more than 20% last year.
We have again used growth in payouts as the primary criterion for our top property funds, rather than market capitalisation.
The secondary measure is growth in the net asset value (NAV) of the funds' property portfolios. This is because they are designed to give high regular payouts, and are in demand as sources of predictable and rising income among retail and institutional investors. Most income is derived from rents paid by tenants in underlying properties.
Premium, the PLS company run by City Properties' Wapnick family, was again the top performer.
Shareholders in Premium are celebrating a 37% rise in payouts and combined NAV and payout growth of 60% (up from 52% last year). Octodec, also managed by the Wapnicks, came second, with a 26% increase in payouts and a total return of 47% (49%).
Hyprop, the blue-chip retail giant jointly managed by Madison, Corovest and Standard Bank Properties, pushed Spearhead from last year's number-three position. Premium, Octodec and Hyprop also showed the biggest growth in their properties' NAV. These were also top performers last year.
But the high-risk B units of ApexHi (the giant fund of B- and C-grade properties offering dual high- and low-risk units, also managed by Madison) gave the fourth-best total return, though the B units' 4,65% payout increase relegated it to 10th position.
Redefine, also in the Madison stable, came seventh, with a 7,56% growth in distribution. Resilient, a retail fund whose portfolio is concentrated on provincial capitals and large towns, and SA Retail came fifth and sixth.
Together with Hyprop, they demonstrate the spectacular recovery of retail property as consumer spending exploded, supported by lower interest rates, improved household incomes and a greater willingness to incur debt.
Atlas and Paramount, both Cape-orientated small-cap funds, complete the top 10.
Growthpoint, SA's largest listed fund with properties worth R8bn, and two other giants, Grayprop and Sycom (3,69%), did not make the top 10, partly because they have been cleaning out their portfolios in preparation for the better times in the sector.
But these are consistent performers, more interested in building steady, growing annuity-type income over the long term for their mainly institutional investors.
Sycom is particularly lean, with arguably the highest quality overall portfolio in the sector as a result of aggressive housekeeping.
Growthpoint, managed by Investec, has been digesting its takeover of former fund Primegro and the Mines Pension Fund properties. Despite having to absorb billions of rand in property, Investec Property Group has managed to keep the underlying property portfolio among the top performers in the International Property Databank ratings.
Grayprop has also been renovating and selling older and lower-grade properties, though not as energetically as Sycom.
For all three funds, last year was the crouch before the leap, and they should make a better showing this year.
The sector continued to recover in 2004 from high interest rates - on average the funds have borrowed about 40% of their portfolio values - and a hangover from the 1990s of too much industrial and office space.
Property prices have risen and investment yields fallen as income has grown. This recovery is turning into a full boom, with industrial property now short of space and office rents beginning to rise fast.
Because the prices of the listed properties have been rising for some time, some commentators are beginning to worry about a bubble bursting and at least one fund manager, Simon Pearse of Marriott, is talking about "the end of boom irrationality".
Pearse worries that if the rand weakens and interest rates rise, the market is likely to dramatically turn down.
But most economists think this is unlikely. Fund managers around the world have been pouring money into property. This is largely to preserve income for clients from the high initial yields and stable performance of commercial property, against the low and volatile yields of equities. This demand has driven initial yields down against the trend of rising interest rates, as global liquidity starts to tighten.
Property's global popularity has also been underpinned by property fundamentals. A decade of positive GDP growth has improved tenant demand, reduced vacancies and increased rents.
SA has been no exception. Ten years of improving economic fundamentals have increased demand. Returns on property have exceeded annual inflation in nine of those 10 years. And they have done so at lower risk than other asset classes. Last year property gave investors a total return of 13,98% (against 13,92% from a fast improving equities market), but at a standard deviation risk of 5,1 (12,83).
Confidence and falling interest rates have pushed up demand for both listed scrip and direct property ownership.
Far from being the end of the cycle, all three main commercial property sectors are still in recovery. Industrial property is just reaching boom conditions, according to Wits property studies professor François Viruly, with retail property close behind and offices still lagging behind in the early recovery phase.
It is a unique opportunity for SA's institutional and retail investors. Property markets have long cycles, averaging 23 years, according to independent property economist Erwin Rode.
This one coincides with a big economic upswing. Given the low starting base after 30 years in the doldrums, and barring major international disasters, long-term compound income growth - which is what property is about - should be turbocharged for at least a few years and outperform most other sectors in the decade ahead.
