Listed Property in SA - towards a fuller understanding of performance and prospects

Presentation by Brian KantorSAPOA Conference | Cape Town | 11th June 2014

Outline

An overview of extraordinarily good performance by SA assets including listed Real Estate

Recent performance - property re-rates vs Bonds

Performance explained fundamentally

A look at capital raising by the sector - why it is important for the economy and property developers - and what fund managers will be looking for from the listed property sector

A focus on initial yield - why it is less important than it seems

The outlook for the SA economy and interest rates

R100 Invested Jan 1st 2004The Winner is Listed Property

1,000

500

400

300250

200

150

100

5003 04 05 06 07 08 09 10 11 12 13 14

JSE ALSI ALBIILBI SA PROPERTYS&P 500 RANDS CASH

Property

Shares

Bonds

Offshore

Cash

Ilbi

R770

R636

1,000

500

400

300250

200

150

100

5003 04 05 06 07 08 09 10 11 12 13 14

JSE ALSI ALBIILBI SA PROPERTYS&P 500 RANDS CASH

Property

Shares

Bonds

Offshore

Cash

Ilbi

R770

R636

Performance post the GFC R100 Invested January 2009 - April 2014

280

240

200

160

120

80I II III IV I II III IV I II III IV I II III IV I II III IV I II

2009 2010 2011 2012 2013 2014

JSE ALSI All Bonds (ALBI)SA Real Estate NYSE (Rands)Cash

Shares

Property

NYSE

Bonds

Cash

280

240

200

160

120

80I II III IV I II III IV I II III IV I II III IV I II III IV I II

2009 2010 2011 2012 2013 2014

JSE ALSI All Bonds (ALBI)SA Real Estate NYSE (Rands)Cash

Shares

Property

NYSE

Bonds

Cash

Total Returns 2013 Jan 1st 2004 to May 31st 2014

200

300

400

500

600

700

800

2014m5

JSE ALL BONDSINFLATION LINKER SA PROPERTYS&P 500 RANDS CASH

SHARES

PROPERTY

BONDS

LINKERSS&P 500 RANDS

CASH

200

300

400

500

600

700

800

2014m5

JSE ALL BONDSINFLATION LINKER SA PROPERTYS&P 500 RANDS CASH

SHARES

PROPERTY

BONDS

LINKERSS&P 500 RANDS

CASH

Total Returns; June 1st 2013 to May 31st 2014

95

100

105

110

115

120

125

130

2014m5

JSE ALSI ALL BONDS ALBIALL LINKERS ILBI SA PROPERTY J253S&P 500 RANDS

SHARES

BONDS

LINKED

PROPERTY

OFFSHORE EQ

95

100

105

110

115

120

125

130

2014m5

JSE ALSI ALL BONDS ALBIALL LINKERS ILBI SA PROPERTY J253S&P 500 RANDS

SHARES

BONDS

LINKED

PROPERTY

OFFSHORE EQ

JSE USD Values and Earnings; 1994 = 100

0

100

200

300

400

500

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

IALNY/11.58703 EALNY/78.0813

JSE

Earnings USD

0

100

200

300

400

500

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

IALNY/11.58703 EALNY/78.0813

JSE

Earnings USD

JSE REAL FINDI 1994 = 100 - Prices catching up with earnings

40

80

120

160

200

240

280

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

(FINDI/CPI)/2.088567(EAFINDI/CPI)/10.24609

REAL FINDI

Real FINDI Earnings

40

80

120

160

200

240

280

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

(FINDI/CPI)/2.088567(EAFINDI/CPI)/10.24609

REAL FINDI

Real FINDI Earnings

SA Property and Distributions; Jan 1st 2003 = 100A justified re-rating currently 15.7 times dividends

80

120

160

200

240

280

320

360

400

03 04 05 06 07 08 09 10 11 12 13 14

PROPERTY DISTRIBUTIONS (DIVIDENDS)PROPERTY VALUATIONS

Dividends

Index Value

80

120

160

200

240

280

320

360

400

03 04 05 06 07 08 09 10 11 12 13 14

PROPERTY DISTRIBUTIONS (DIVIDENDS)PROPERTY VALUATIONS

Dividends

Index Value

SA Listed Real Estate; Market Value - A sector of growing importance

Able to raise capitalBut much has gone abroad

Much has gone offshore

Following the money

Does the sector offer diversification for fund managers?

The Betas for the Property Sector. Bonds and EquitiesLess sensitive to both markets

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

BETA_PLIONALBITOP40ORTHBETA_PLIONT40ORTH

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

BETA_PLIONALBITOP40ORTHBETA_PLIONT40ORTH

Initial Yields - All Shares vs SA Property

0

2

4

6

8

10

12

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

JSE All Share Dividend YieldJSE SA Property Dividend Yield

Property

Shares0

2

4

6

8

10

12

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

JSE All Share Dividend YieldJSE SA Property Dividend Yield

Property

Shares

JSE Property and All Share Indexes; Dividend Flows March 2002 = 100

500

400350300

250

200

150

100

5002 03 04 05 06 07 08 09 10 11 12 13 14

Property Dividend FlowJSE Dividend Flow

ALSI

Property

500

400350300

250

200

150

100

5002 03 04 05 06 07 08 09 10 11 12 13 14

Property Dividend FlowJSE Dividend Flow

ALSI

Property

Growth in Dividends All Shares vs Property

-40

-30

-20

-10

0

10

20

30

40

02 03 04 05 06 07 08 09 10 11 12 13 14 15

Property Dividends Growth SmoothedJSE ALSI Dividends Growth smoothed

Alsi

Property

-40

-30

-20

-10

0

10

20

30

40

02 03 04 05 06 07 08 09 10 11 12 13 14 15

Property Dividends Growth SmoothedJSE ALSI Dividends Growth smoothed

Alsi

Property

Property vs All Shares; Growth in dividendsProperty Dividends - About half as fast but a third as variable

Growth in DividendsSample: 2002M03 2015M10

Property ALSI

Mean 6.67 14.86 Median 5.59 20.57 Maximum 22.73 43.53 Minimum -7.77 -41.42 Std. Dev. 6.08 18.77 Skewness 0.05 -1.27 Kurtosis 2.83 4.20 Observations 134 134

SA Property Dividend Flows and CPI 2003.12 = 100Beating Inflation - can it continue to do so

80

100

120

140

160

180

200

220

03 04 05 06 07 08 09 10 11 12 13 14

SA listed property DistributionsCPI

Prop Dividends

CPI

80

100

120

140

160

180

200

220

03 04 05 06 07 08 09 10 11 12 13 14

SA listed property DistributionsCPI

Prop Dividends

CPI

Equity vs Bonds vs Property; Initial YieldsBonds>property>equity

0

2

4

6

8

10

12

14

16

18

02 03 04 05 06 07 08 09 10 11 12 13 14

JSE ALSISA PropertyRSA 10 year

Property

Bonds

Equity

0

2

4

6

8

10

12

14

16

18

02 03 04 05 06 07 08 09 10 11 12 13 14

JSE ALSISA PropertyRSA 10 year

Property

Bonds

Equity

Equities Bonds and Property Yield Gaps

-4

0

4

8

12

16

02 03 04 05 06 07 08 09 10 11 12 13 14

Bonds - Equities Initial YieldsBond Yield- Property YieldProperty -Equity Yield

Bonds-Property

Bonds -Equities

Property-equity

-4

0

4

8

12

16

02 03 04 05 06 07 08 09 10 11 12 13 14

Bonds - Equities Initial YieldsBond Yield- Property YieldProperty -Equity Yield

Bonds-Property

Bonds -Equities

Property-equity

SA property realised and required dividend growth

0

4

8

12

16

20

24

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Growth in Property DividendsGrowth Implied by Bond Yields and 2% risk premium

Realised growth

Required Growth

0

4

8

12

16

20

24

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Growth in Property DividendsGrowth Implied by Bond Yields and 2% risk premium

Realised growth

Required Growth

Property and Inflation Linked YieldsIs property Inflation protected?

0

2

4

6

8

10

12

03 04 05 06 07 08 09 10 11 12 13 14

Inflation Linked Index YieldProperty Index Dividend Yield

SAPDY

ILBI

0

2

4

6

8

10

12

03 04 05 06 07 08 09 10 11 12 13 14

Inflation Linked Index YieldProperty Index Dividend Yield

SAPDY

ILBI

The Real Yield Gap – Property less Inflation Linkers – is there an inflation adjusted return case for property?

3

4

5

6

7

8

03 04 05 06 07 08 09 10 11 12 13 14

Nominal Returns: Property vs Inflation Linkers

5

10

15

20

25

30

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Nominal Return Listed propertyNominal Return Inflation Linkers

Property

Inflation Linkers

5

10

15

20

25

30

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Nominal Return Listed propertyNominal Return Inflation Linkers

Property

Inflation Linkers

Property vs Inflation LinkersComparing Risk Adjusted Performance - the Sharp ratio is much superior for listed property

Sample: 2004M12 2014M05Excess ReturnsProperty Linkers

Mean 8.40 1.20 Median 8.04 1.67 Maximum 20.38 3.53 Minimum 0.53 -1.17 Std. Dev. 4.06 1.28 Skewness 0.58 -0.13 Kurtosis 3.25 1.77

Jarque-Bera 6.54 7.48 Probability 0.04 0.02

Sum 949.60 135.29 Sum Sq. Dev. 1844.77 183.06

Observations 113.00 113.00

Sharp ratio 2.07 0.94

Acucap vs Growth Point; Dividends and Dividend YieldSame growth - different yield

80

120

160

200

240

280

4

6

8

10

12

14

03 04 05 06 07 08 09 10 11 12 13 14

ACUCAP DIVIDENDSGROWTH POINT DIVIDENDSACP Dividend YieldGRT Dividend Yield

Dividend Y

ieldD

ivid

end

Flow

80

120

160

200

240

280

4

6

8

10

12

14

03 04 05 06 07 08 09 10 11 12 13 14

ACUCAP DIVIDENDSGROWTH POINT DIVIDENDSACP Dividend YieldGRT Dividend Yield

Dividend Yield

Div

iden

d F

low

Dividend Flows; ACP & GRT vs Index 2003=100

80

100

120

140

160

180

200

220

240

260

03 04 05 06 07 08 09 10 11 12 13 14

ACP GRT SAPY (J253)

80

100

120

140

160

180

200

220

240

260

03 04 05 06 07 08 09 10 11 12 13 14

ACP GRT SAPY (J253)

Initial Dividend Yield and subsequent relative performanceThe DY relative to the index DY at each time point and compares it to the subsequent 12m return relative to the index. There is no link.

SA Risk Premium Daily Data to June 6th 2014

4.0

4.4

4.8

5.2

5.6

6.0

6.4

III IV I II III IV I II

2012 2013 2014

RSA and USA Long Bond Yields

6

7

8

9

10

11

1

2

3

4

5

6

03 04 05 06 07 08 09 10 11 12 13 14

SAGB10 USGB10

<<<RSA

USTB>>

6

7

8

9

10

11

1

2

3

4

5

6

03 04 05 06 07 08 09 10 11 12 13 14

SAGB10 USGB10

<<<RSA

USTB>>

Yield Spread and ZAR; Daily Data 2014

5.0

5.2

5.4

5.6

5.8

6.0

6.2

10.2

10.4

10.6

10.8

11.0

11.2

11.4

M1 M2 M3 M4 M5 M6

2014

SPREAD ZAR

YIEL

D S

PR

EAD

ZAR

<<<SPREAD

5.0

5.2

5.4

5.6

5.8

6.0

6.2

10.2

10.4

10.6

10.8

11.0

11.2

11.4

M1 M2 M3 M4 M5 M6

2014

SPREAD ZAR

YIE

LD S

PRE

AD

ZAR

<<<SPREAD

RSA Sovereign Risk premium

May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-1450

100

150

200

250

300

Sovereign risk premium

Boston Consulting Group applied to Return on Capital

Applying Holt Analytics to SA Property