SA’s listed property market was one of the best-performing asset classes between 2003 and 2007. Brian explains what led to the significant valuation decline since early November 2007: ‘South Africa is not immune to the factors that precipitated the global economic collapse (these were property-related in their origin and based in the US residential market). SA is an emerging market, and when investors withdraw, all markets are affected. At the time the market was oversold and we went through a period where yields were not reflective of value – there was bound to be a correction. However, this is an over-correction.’

While cash provides an attractive income yield at present, having increased in line with interest rate hikes, Brian sees value in the property sector. ‘I believe interest rates will come down – the trend in thinking has been that this will happen in the first quarter of 2009, and of course the property industry is very sensitive to interest rate cuts. Yields are offering excellent value now. Going forward, we’ll see this as a good buying time.’

He emphasises, ‘There is value on the listed sector because the value of the underlying asset is higher than where the market is placing it.’
Regarding retail property, which has taken some flack in recent times, he cautions that ‘retail is not going to stay in the doldrums. A number of retail-dominated funds have excellent assets – one of those is HiProp. It’s all about cycles – over the next six to 12 months retail doesn’t look good, but you’ve got to remember: property is a long-term investment.’

Asked whether funds are likely to hold back on property investment now and build up cash reserves, Brian says it is business as usual, but noted that ‘funds sitting on cash were in a good position – there are good values around now that are more representative of reality, but to borrow cash is expensive’.

Discussing whether Redefine would be increasing its direct property investments in 2009 or investing in other listed property funds, he notes that it was an opportunistic fund and ‘would go where the value is – if there’s opportunity’.

It’s not the first time the funds in the Madison stable have sought to amalgamate. This time the shareholders and the competition board may well give them the green light. Opportunity indeed!

Brian says vacancy levels may increase marginally over the next year or so, but that developers are ‘showing more circumspection’ so there isn’t a huge amount of speculative development. He sees some room left to grow rentals, and where below-market level leases expire there will be increases, but ‘we’re not going to see as robust a letting market as we’ve seen in the past few years’.

While some economists have hinted at very little industrial development going forward, Brian points out that there are many industrial leases where the rental is far below market; these will be adjusted upwards.

Brian is a champion of the green building initiative. He says Redefine is looking at fitting new developments with green technology, ‘but we’ve got to tie up with a company that can offer this technology’.

Redefine Income Fund Ltd, +27 (0)11 283 0000, www.redefine.co.za