By Suren Naidoo
MSCI’s influential IPD South Africa Annual Property Index, which was release today, showed that the local property investment sector delivered an ungeared total return of 11.7% in 2017. This was less than a percentage point up from 2016’s return of 10.9%, but comes as somewhat of a surprise considering tumultuous politics and lacklustre SA economic growth last year.
It highlights the resilience of the SA property sector and the case for a better performance going forward, following the political changes that have seen positive sentiment in the market.
MSCI Inc – which is a leading provider of investment decision support tools worldwide, including indexes, portfolio risk and performance analytics and ESG research – said in a statement that the IPD South Africa Annual Index had outperformed the MSCI SA Equities Index and the JP Morgan bond index (7-10 year) over 3, 5 & 10 year periods. The IPD South Africa Annual Index is sponsored by Nedbank CIB.
MSCI said: “The 80bps uptick in total return recorded for 2017 was driven by an improved capital growth of 3.2% relative to 2.3% recorded for 2016, as a result of positive contributions from both base rental growth and a strengthening base rental yield. Meanwhile, income return was down by a marginal 20bps to 8.3% as the market saw some yield compression through the year, which was driven by an improved demand for space.”
It added: “At an overall level, the commercial property vacancy rate improved 100bps to end the year at 5.1% from the 6.1% recorded 12 months prior. Notwithstanding the higher occupancy rate, rental growth declined to 3.9% from 5.3% in 2016, reflective of the competitive letting environment and increased refurbishment activity in specific sectors.”
According to MSCI, the latest IPD South Africa Annual Property Index is based on asset level data collected from a sample of 1,649 properties with a total capital value of R356 billion at the end of December 2017. This represents approximately two thirds of professionally managed investment property in South Africa.
“Real estate is a distinct and mature asset class, with a unique risk-return profile that’s attracting increased asset owner flows. The IPD South Africa Annual Property Index, which includes both listed and private real estate portfolio’s, provides a perspective on the fundamental drivers of commercial real estate returns in South Africa,” said Phil Barttram, Executive Director, MSCI.
“As an asset class, real estate continues to provide stable incomes, founded on contractual rental and aggressive cost management. The sector has once again proven its resilience by providing real returns in 2017,” he added.
Robin Lockhart-Ross, Managing Executive, Nedbank CIB Property Finance said: “We were encouraged by the total return of 11.7% achieved by the SA investment property sector over the course of 2017, as reflected by the results of the annual IPD index, especially in the context of SA’s economic circumstances. In our view, it is significant not only that at 8.3% the income return was still above inflation, but also that at 3.2% the capital return, although below inflation, was still positive in what was a tough year for commercial property.”
Lockhart-Ross noted: “Although both listed and direct property underperformed equity in 2017, both continue to have outperformed other asset classes over all measurement periods. It is this stability of income performance and retention of capital value on a long-term, through-the-cycle basis, that attracts Nedbank CIB as the major lender into the commercial property sector,” he said.
Digging down into the detail at a sector level, the IPD index show that retail property was the top performing sector during the year with a total return of 12.3%, fractionally outperforming industrial – also at 12.3%. The office sector, albeit delivering an improved total return of 10.3% compared to 7.6% a year before, continues to struggle on the back of subdued capital growth.
“At a property segment level, city decentralised (non-CBD) offices was the worst performing segment for the year with a total return of 9.2%. Despite a stronger rental yield and positive rental growth, a negative income residual dragged down capital growth – suggesting a negative sentiment around the segment’s prospects,” said MSCI.
“The underperformance of decentralised offices was offset by the inner city office segment, which was the second best performing segment during 2017, driven by a sharp decline in vacancy rate as funds offloaded non-core assets. Underlining this is the fact that the inner city office segment counted among the segments with the highest level of sales activity for the 2017 calendar year,” it added.
MSCI said high-tech industrial and light manufacturing industrial counted among the top performing segments for the year with total returns of 14.3% and 14.1%, respectively. Among the retail segments, Super Regional centres outperformed with a total return of 12.9%. It added that retail property segments were relatively tightly grouped with the poorest performing segment being Small Regional centres at 11.8%.