Local listed property in South Africa is overpriced at current levels and investors should avoid the industry until prices are reduced to fair value. The listed property market is currently trading at about a 45% premium to reported net asset value (NAV) of underlying property values.

The sector is more expensive than it has been for a number of years and there is therefore no margin of safety to offer investors protection from a permanent loss of capital.

Listed property dividend yields are closely correlated to long bond yields in South Africa. Long bonds are more expensive than ever before, and property yields have last been at these levels in the run-up to the financial crisis in the late 2000s.

The listed property index is currently trading at an historic dividend yield of 6,32% compared with the earnings yield of the JSE’s All Share Index (Alsi) of 7%. This implies the market expects listed property to grow earnings into perpetuity at a faster rate than the Alsi. However, historically, listed property has grown earnings at 4% per annum less than inflation over the last 35 years and even the property loan stock index has only grown earnings at 2.5% per annum less than inflation.  Over the same 35-year period, the Alsi has grown earnings at 4.5% better than inflation.

On an historical basis, listed property should be priced at a discount to the earnings yield of the Alsi, not at a premium.

The correct time to start investing in listed property will be when the market has absorbed all the bad news and investors are shying away from the investment. The time to invest will therefore be after a few years of disappointing earnings growth, which will effectively change pricing perceptions.

At RE:CM, the core of our investment philosophy is to buy cheap assets that are of good quality. We look for assets where we believe the value of the asset exceeds the price in the market, as we believe these attributes offer our clients protection from a permanent loss of capital. We are therefore staying away from listed property at this moment in time, but continue to monitor the sector for pockets of value.

*John Rainier, property analyst at value asset manager, RE:CM, 

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