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Poorer distribution prospects for listed property sector

Monday, October 26, 2009

Even as the income streams of listed property funds are still showing fairly robust growth, softer direct-property fundamentals will most likely hinder future distribution.

Over the three months from July to September 2009, the yearly growth of income streams from property loan stock funds still managed to average roughly 10% (the shaded area in the corresponding graph). But, given the economic climate, one has to consider how conditions have changed at ground level, given the impact that a softer economy is having on direct-property fundamentals.

Says economist John Lottering of Rode & Associates: ‘Rising voids – tenants closing shop or downsizing, and thereby requiring less space – means a direct loss of rental income to the listed funds. Also, tenants are naturally only too aware of stalling turnover growth, and those who are about to enter into new contracts are aware of their increased rental-bargaining power. This could mean that some landlords – especially owners of shopping centres − will be under duress to offer rental concession.’

To these woes should be added anecdotal evidence that bad debts are rising sharply.

Already – as the graph which follows shows – the yearly growth in the market rentals of regional shopping centres has fallen off a cliff. Commenting on this, Erwin Rode, CEO of Rode & Associates adds: ‘Imagine what must be happening to smaller neighbourhood and convenience shopping centres, and bear in mind that the property portfolios of listed funds consist of a large percentage of retail property.’

Hence, despite the still fairly robust distribution growth, Rode believes the market will soon see a leveling-off of cash-flow growth first in shopping centres, then in the industrial sector and finally in the office sector.

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