ALREADY stung by global market woes, the local listed property sector looks set for more pricing pressure thanks to the latest interest rate hike.
Evan Jankelowitz, co-head of Stanlib Property Franchise, says the hike will have a two-pronged effect on listed property because the sector behaves both like long bonds and equities.
He says listed property is sensitive to interest rates, as bonds are.
“It acts like a bond in that as interest rates go up, property prices go down,” says Jankelowitz.
Like equities, listed property is reliant on an earnings stream from an underlying business, which in the case of the property sector is the rental property market.
Weak consumer cash flows, which are being put under pressure by the latest interest rate hike, combine with other pressures such as food inflation, electricity costs and a much higher petrol price so that “there is not much left in the consumer’s pocket”.
“This hike potentially pushes them (consumers) over the edge.”
Jankelowitz said he was expecting further volatility in listed property prices.
While the macroeconomic environment with a rising interest rate cycle is negative for all commercial property in general, retail property, in particular, would be hit first and hardest.
“If the consumer is not there, people cannot afford to do business, and from that rentals in the retail property market are not paid. This will have a serious effect on listed property companies with large exposures to retail.”
Len van Niekerk, head of quoted property at Old Mutual Investment Group SA, says there is no doubt that listed property companies will experience tougher business conditions, “given the higher interest rate and higher inflation effects on consumers and the broader economy”.
The growth of distributions by listed property companies is expected to slow this year from about 13% last year to about 11% this year, Van Niekerk says.
It could possibly slow even further in the next two years, he says.
“Important, though, is that this growth is still likely to be higher than the inflation rate — providing investors with real income growth.”
Van Niekerk says residential property will be harder hit than commercial property because commercial property has not suffered from the same level of development as residential property in recent years.
But he says residential property rentals are likely to rise, as buying becomes increasingly less affordable because of higher interest rates.
“Commercial rentals are also expected to rise but performances between different properties in different sectors could vary quite significantly.”
Ian Anderson, an independent property analyst and a director of Re-Connect, says the main concern for the listed property sector is the degree to which it is exposed to retail tenants.