People are very bullish about listed property in South Africa. Even I have been a bit bullish in some ways – talking about how REITs* seem to be the best option for the new Tax Free Savings Accounts (see here).
*Real Estate Investment Trusts – listed property vehicles on the JSE and other exchanges.

But I have some concerns.

Even if some of them are a bit anecdotal.

Firstly, a graph, showing how money is pouring into the listed property market:

Market Capitalisation of Listed Property in SA (thanks
Market Capitalisation of Listed Property in SA (thanks

Even though this:

SA REIT yields versus SA Bond Yields
SA REIT yields versus SA Bond Yields (thanks again)

SA Listed property is now consistently generating rental yields below that of long term bonds.

And I find that deeply concerning, as it seems to suggest that we’re on the tail end of a feedback loop.

The Listed Property Feedback Loop

  1. The initial listed property funds are very successful, generating high rental yields.
  2. These attract in more capital – which is used to go in search of similar properties that generate similarly high yields.
  3. This, in turn, attracts more capital.
  4. If this cycle continues, the market inevitably reaches a point where it has more money than there are high-yielding properties to invest in.
  5. Especially as all the money chasing the same properties will just as inevitably drive up property prices.
  6. So the funds start to invest in lower-yielding properties. And they develop on free land. And they go in search of higher-risk properties that might generate higher yields. And the risk is acceptable because the portfolio is now well-diversified and can cope with more risk, and so on and self-justified.
  7. Meaning that property prices continue to rise.
  8. But the increased demand is not driven by need or usage – it’s driven by an over-availability of capital chasing return.
  9. And you can’t escape the market fundamentals indefinitely, because the whole premise of this investment is the rental yield.
  10. With this oversupply of property space, despite the rising property prices, you start to see a drop off in rentals.
  11. This is now a renter’s market.
  12. And here is where it all gets a bit sticky: because people start to say things like “We’re concerned about the dropping rental yields – but there are strong prospects for capital appreciation with the growing investor appetite for listed property investments.”
  13. Pardon?
  14. Question: what drives long term capital appreciation in property markets?
  15. Answer: mostly rental yields. The nominal kind. So one part inflation, one part economic growth. The rest is mostly speculation.
  16. And when you have nominal rents falling (as in, not just drop offs in real return – but deflation in the rental market), that has one highly probable outcome: falling property prices.

The Anecdotal Concerns

As I drive around Johannesburg, I see “To Let” signs everywhere. They’re on highways and in shopping centres and around the perimeters of office parks. And I’m talking about the popular areas: Sandton and Illovo and Melrose.

And it’s not just the office space market. I’ve been looking for a new place to live – and I don’t even have to negotiate rentals down. They’re dropping all on their own – great big 20% drops from what they were yielding in December 2014. And they’re going to drop further – because those places aren’t moving. I’m strolling in to view them, two months after their adverts first went up, getting all picky about finishings and noise and whether it’s close enough to a highway.

There is real desperation in the air.

And so, for all the talk of how 2015 is going to be a seller’s market and all the investment potential in the listed property space, I have to wonder just how realistic that is. Particularly because, thinking about the last Big Crash, I’m just not sure that there’s such a big difference between REITs and mortgage-backed securities.

Isn’t the line: “I don’t like paying rent because it means paying someone else’s mortgage?”

In both scenarios, the investor is ultimately both bank and owner of the property.

So not really too much of a difference at all…

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at