Advice and Opinion

Coronation Fund Managers' property buying strategy holds a great deal of weight to it

Those who believe, in his view correctly, that South African property tends to follow the patterns and trends of the global market should, says Bill Rawson, Chairman of the Rawson Property Group, take time to assess the information provided in a recent article by Neil Padoa, a global developed market analyst with Coronation Fund Managers.

“What I found significant and encouraging about this article,” said Rawson, “was that Coronation, one of South Africa’s top fund managers, is heavily invested in property-related stock worldwide and, having been extremely careful in their selection of their property assets, appears to be achieving good results. For example, their office portfolio, which is focused mainly in the area from Australia to Singapore, is giving a 7% return. Other returns are even more satisfactory.”

Coronation, said Rawson, report that they bought strongly in selected emerging markets during the period when those markets’ currencies and prices dropped – sometimes by as much as 50%. Coronation now expect these stocks to compound at higher rates than their investments in the developed countries, the low entry levels more than compensating for the higher risk.

As Rawson himself has so often said, Neil Padoa has stressed that property markets require ‘a longer mindset’ than most investments but tend to be very satisfactory in the long run. Values can often be obscured by temporary under-earning periods, for example when fast redevelopment activity for a time depresses rentals. Listed property stocks in almost all the markets in which Coronation invested, it is reported, are now yielding better returns than Sovereign Bonds.

Rawson said that he was particularly interested to see that Coronation is heavily committed to residential markets in Germany and Japan – for what appear to be very good reasons.

“In Germany they calculate current values to be in real terms below the levels of 40 years ago. In nominal terms Padoa says that it is now possible to buy a German apartment for only slightly more than would have been paid 20 years ago, despite the steady growth over this period of incomes, population figures and rentals.”

“Whereas the average British home bought 20 years ago for 100 units is now worth 330 to 340 units, the average German home bought for 100 units 20 years ago has now risen by 15 to 20 units.”

Coronation, says Rawson, believe that the German market is still significantly undervalued, probably by as much as 25%, and therefore has been a good place to invest — which they have done.

In Japan, said Rawson, Coronation report that the deflation caused by the bursting of the 1990 property bubble saw the Japanese house price index drop from 220 units to below 80 units – perhaps the biggest drop ever seen worldwide. Residential property prices there are still, according to the Coronation figures, on a par with those seen 30 years ago but gross rentals have risen 6,5% to 7% per annum, making huge returns possible in a country where bank finance is still available at 1,5% fixed for a seven year period.

Are these figures and opinions in any way relevant to the South African property scene as Rawson has indicated?

“The Coronation report shows that most property, including residential, yields good returns to those who analyze the markets carefully and buy at the right time will be rewarded. Coronation’s approach is the exact opposite to that of the emotionally driven, fashion following investor who tends to wait until the market is about to peak before making his decision – and then quite possibly loses out. Good fund managers and investors buying in the down periods do very well out of the subsequent rises and in my view the South African residential property market is still a long way off peaking and is not in a bubble phase. This, therefore, is still a good time to buy here. Those who hesitate will, I believe, regret it later.”