Recent comments from senior management at some of the world’s largest listed property companies suggest the worst of the crisis is behind us. Rental levels have stabilised, property values have started rising again, albeit slowly and accessing capital for growth is proving easier and less costly. Importantly, the last year has also weeded out the weaker operators and the global listed property sector is now characterised by experienced management teams, superior quality property portfolios and strong balance sheets. With access to capital, the leading companies are expected to be active buyers as distressed sellers, unable to roll loans are forced to sell quality properties at discounted prices.
Rental levels are also expected to rise during 2011 and accelerate thereafter as the global economic recovery gathers momentum. Limited supply of new space will also play its part in driving rentals higher. A quick scan of most major city landscapes reveals little or no new development activity and those developers undertaking projects have, in most cases, already secured leases for the new space being developed. Although developers are likely to find it easier accessing credit, stricter lending criteria will curb most marginal developments and banks will demand greater security, including a certain level of pre-letting before granting loans. This will place further downward pressure on the level of new supply over the next 3 years and will certainly result in very little speculative development.
Rental growth will also be boosted as shorter leases, signed at discounts to market during the height of the credit crisis, will be renewed at market rentals over the next 12 to 18 months. In most instances, landlords accommodated lower rentals for a short period of time to allow their tenants to avoid bankruptcies and maintain occupancies in their properties. With the economic recovery gaining traction, tenants are in a position to revert back to paying market-related rentals. Although it is difficult to estimate the exact quantum of rental uplift, by way of an example, Liberty International indicated at their March results presentation that they expect to add an extra £20 million to their rental revenue from renewals on short-term leases in 2010 and 2011. This would add approximately 5.4% to Liberty International’s net rental income.
Although the prices of listed property securities have rallied in the past 13 months (the MSCI US REIT index is up 144% since 06/03/2009), they remain more than 40% below their 2007 peaks. The current dividends are low, but reflect the fact that most listed property companies are retaining approximately 30% of their cash earnings to fund future acquisitions. On a cash earnings basis (i.e. rentals less property operating and administrative expenses) the average yield is approximately 5.7%, which is substantially higher than the 2.8% yield on the JP Morgan Global Government Bond Index (a proxy for bond yields) and cash, which is yielding 0% or a fraction of a percent in most developed markets. While the capital growth enjoyed over the past 12 months is not expected to be repeated, the high income yield remains attractive relative to other asset classes and will lend support to global listed property securities in the medium-term.
*Ian Anderson is chief investment officer of Grindrod Bank, Article from Realestateweb
