The steady resurgence in listed property prices since March year has seen the sector recover by more than nine percent over the past four months, but fund managers say that property is currently an expensive asset class.

Although property under-performed equities in the first two months of this year, the gap between the performance of listed property – as measured by the FTSE/JSE South African Listed Property index – and equities – as measured by the FTSE/JSE All Share index (Alsi) – has narrowed considerably over the past four months.

For example, if you had invested R100 in the Listed Property index on July 1 last year, your money would have been worth R120.47 on June 20 this year. This return would not have been far off the return offered by the Alsi, where your R100 invested on July 1 last year would have been worth R124.64 on June 20 this year.

Geoff Noble, an investment analyst at Grindrod Asset Management, says the property sector does offer some value and Grindrod’s view is that, based on current prices, the sector offers an average return of 8.33 percent of income.

“In addition, listed property offers a growing income stream in which we expect distributions to grow by between six percent to eight percent a year over the next three years,” he says.

The market capitalisation of the listed property sector is now more than R130 billion, and new property loan stocks are expected to list on the JSE before the end of the year, Norbert Sasse, the chairman of the Property Loan Stock Association, says.

“Two new listings already this year, as well as further listings expected in the coming months, is a good sign for the sector. The listings show confidence in the listed property sector, based on its positive past performance and its capacity for healthy future returns both immediately and in the long term,” Sasse says.

However, some fund managers are not so bullish on listed property. In its half-year report, Marriott says that rapidly escalating electricity prices and municipal rates will retard income growth, making property an expensive asset class.

Herman van Velze, the manager of Stanlib’s Balanced Fund, agrees with this assessment and says his fund has an exposure of only 2.5 percent to listed property, because it is an expensive class.

Adam Ebrahim, the chief executive officer of Oasis Group Holdings, says that investors should be very cautious about new listings in the property sector, because the yields in the physical property market appear to be expensive relative to their history and they are below their funding cost.

“This could result in poor-quality portfolios being listed at inflated prices. In certain cases, management have been selling on listing, further highlighting potential risks.

“In addition, investors need to do their due diligence on the upfront fees and ongoing charges earned by promoters and vendors of new listings, to determine if there is a fair balance and alignment with the interest of investors,” Ebrahim says.

The operating environment for the commercial property market continues to improve gradually, with vacancies stabilising or starting to reduce, supported by very low activity levels in new developments, Ebrahim says.

“Major banks are financing less commercial property and we do not expect an uptick in supply for some time.

“Tenant bad debt has also started to fall, and on average we are seeing a return to rental growth on renewals, but the potential for rental growth has been reduced by the pressure of the impact of energy cost increases on tenants’ occupation costs,” Ebrahim says.

According to the latest Rode Report on the South African Property Market, office rentals nationally strengthened by nine percent in the first quarter of this year. However, Erwin Rode, the chief executive of Rode Associates and the publisher of the report, says that vacancy rates are still not falling.

The report states that industrial property is showing signs of a recovery, with vacancy rates appearing to level off and rentals growing by four percent nationally. This comes after a sharp cooling in growth and, in recent quarters, even a contraction in rentals, Rode says.