U.S. Real Estate trends ring true in Africa

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Stanlib’s head of listed property funds, Keillen Ndlovu says U.S. property markets seem to have priced in potential Fed interest rate hikes. There will be volatility running up to the first interest rate hike. Stanlib’s head of listed property funds, Keillen Ndlovu says U.S. property markets seem to have priced in potential Fed interest rate hikes. There will be volatility running up to the first interest rate hike.

The American property market will be strong enough to withstand an interest rate hike by the Federal Reserve Bank there, according to a report by Bank of America Merrill Lynch.

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But other nations could be in for some challenges and their property markets could experience some volatility, including South Africa.

An interest rate hike would see bond yields rise, pushing down bond prices. Listed property prices tend to track bonds as they are both income-generating investments.

Listed property investors have for months feared rising interest rates were imminent. But the Fed has held off for a while. Now a property investment conference held by Bank of America Merrill Lynch has affirmed that the rate hike is likely to occur before the end of this year.

Property stocks have done well in SA and Africa over the past few years but a struggling South African economy and a constantly weak rand are set to put the fast-growing sector under increasing pressure.

Catalyst Fund Managers’ Global Listed Property Review for September, the South African Listed Property index achieved a 13.26% total rand return in the first nine months of this year. North American property then achieved a 14.48% return and Australia pulled off 14.1%. But Europe reigned supreme with a tremendous 27.92% return and a world average of 15.43%.

Stanlib’s head of listed property funds, Keillen Ndlovu is optimistic however.

“The US property markets seem to have priced in potential Fed interest rate hikes. There will be volatility running up to the first interest rate hike,” said Mr Ndlovu.

Mr Ndlovu attended the conference last month. Speaking to Africa Property News, he said it was worth comparing SA with the US even if the US’ property market was much larger.

"No portfolio manager seems to be willing to take an underweight position on the US right now. The UK also continues to experience good demand and rental growth, real rental growth, but I’m focussing some attention on the US at the moment,” he said.

He said US listed property was trading at a discount to private property. Some of the smaller property companies could be thus taken private, that would being taken over by private players and delisted. This would benefit African investors who owned property directly in the UK.

He said the US economy was strong and its property market, in terms of activity on the ground, had not been affected very strongly by the volatility in global markets.

Sam Zell, a property investor from the US, spoke at the conference. Zell represents Equity Group Investments.

He said he believed the US dollar was too strong for a Fed interest rate hike.

“The single biggest thing right now is currency issues around the world. There is no need for interest rate hikes in the US now given the strength of the dollar. The US is the best economy in the world right now,” Mr Zell said.

Mr Ndlovu said it was likely that more companies would spend their money redeveloping buildings as opposed to building new ones, as development yields were much higher than acquiring existing buildings. The case was similar in South Africa.

However, the US’ office market had become relatively stronger compared with South Africa’s.

“Office market activity is back to 2006 levels. The recovery has been driven by technology companies and law firms but is now widespread. This may happen in South Africa but it has not yet,” he said.

Office tenants were willing to pay more for better space with break-out areas, open areas, good volume of light, decks, coffee shops, and so on.

America was also experiencing its best industrial market in 30 years largely being supported by e-commerce companies.

“E-commerce continues to drive the industrial sector. Retail landlords are finding ways to work with the internet. They are embracing technology with Wi-Fi and apps as well as introducing more food, beverage and entertainment. Impact of internet on retail sales in malls is not as bad as the market thinks,” said Mr Ndlvou.

He said South Africa’s economic growth would continue to be sluggish which would hold back its listed property sector but later in 2016 and 2017, South Africa should start to experience similar trends to the US and also some strength in its listed property market.

In terms of retail, no new shopping malls were being built in the US. This trend would likely spread to SA.

“There are no big new malls being built in the US either. More shops will become specialised or online focused. The future of department stores is in question with footfall declining,” he said.

This would support the storage sector which was very strong and would continue to be.

Equites CEO Andrea Taverna-Turisan has agreed with Ndlovu. Equites, which is listed on the JSE, owns many distribution centres and warehouses.

“People who sell online goods have to store them somewhere. This is why storage does well in the US and will do so too in SA,” he says.

Ultimately, Nldovu says people are concerned about economic volatility in China, the world’s second largest economy.

“China is a big market for many companies and listed property groups are wary of their GDP growth having slowed recently,” he says.

Read more on:

South Africa Property Market  |  Real Estate Investment Trust (REIT)  |  Keillen Ndlovu  |  Bank of America Merrill Lynch  |  Catalyst Fund Managers  |  US Property Market  |  Andrea Taverna-Turisan  |  Sam Zell

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