The outcome of the referendum for Britain to leave the European Union (Brexit) has sent rand-hedge property stocks into massive sell-down on the JSE and London Stock Exchange (LSE).
Property companies with extensive real estate investments in the UK and the greater European regions have been largely hit on both bourses.
Among the UK-focused companies that saw a sizeable sell-down of their stocks in early morning trade on the JSE on Friday are Capital & Counties Properties (-17.47%), Intu Properties (-13.01%), Capital & Regional (-8.09%), Stenprop Limited (-7.15%), Atlantic Leaf Properties (-5.13%) and Redefine International (-9.18%).
Property counters which invest in other parts of Europe were not spared – with Schroder European Real Estate Investment Trust’s stock pulling back by 8.07%, MAS Real Estate’s share price down 4.29% and Sirius Real Estate’s share price down by 1.4%.
Property stocks that also have a primary listing on the LSE were down between 10% and 15%. In the past three years, rand hedge property stocks have outperformed their SA-focused peers. And offshore markets have acted as a buffer against SA’s worrying state of the economy for income-chasing investors and multi-asset funds looking to diversify their returns.
Britain’s vote to leave the European Union has sparked a wild descent across global equity markets. Bond and currency markets have been also volatile.
SA’s five-year swap rates were up in a 10 to 15 basis points range, which has implications for rising debt costs for property companies. The sterling pound was in freefall early this morning, dropping by roughly 11% against the US dollar to about $1.33 – levels believed to be last seen in 1985. In SA, the rand has traded in a range of R14.33 to R15.60 to the dollar.
Discount to UK’s listed property
Listed property prices in the UK have been falling leading up to the Brexit referendum, with some property punters rating the asset class as being attractive.
Before the pullback of property stocks, the UK’s listed property sector was trading at approximately 20% discount to net asset value (NAV) says Catalyst Fund Managers portfolio manager Zayd Sulaiman. “And this discount is even larger now,” he says.
Although it might be tempting to make more allocations into the UK’s listed property market at these levels – or switch from offshore property stocks to SA-focused ones in a knee-jerk reaction to market strife – Sulaiman says it’s early to make the call that the sector is attractive.
He tells Moneyweb: “It now depends on what the politicians decide in respect of auctioning Brexit and the long-term impact on macroeconomic fundamentals. The question is whether businesses in and outside of the UK have the confidence to invest or expand in the UK or not, and whether the consumer has the confidence in continuing to spend and live as normal. There is a lot of uncertainty in the market and volatility is expected in the short-term.”
A Johannesburg-based analyst, who asked not to be named, supports Sulaiman’s views, saying “it’s hard to get a sense of what is yet happening and the impact thereof. There has been some overreaction to the sell-down of stocks,” the analyst adds.
Grindrod Asset Management chief investment officer Ian Anderson has been concerned about the valuations of UK-focused property stocks. “While we’ve acknowledged that the large discounts to NAV could possibly offer a great entry point, we have always been concerned about a ‘bubble’, especially in the London office and residential markets and more recently in the retail market,” says Anderson.
He says the threats to a property correction in the UK have been growing for some time and “we felt that NAVs were reflecting peak of cycle rents and capitalisation rates and were at risk of falling in the years ahead.”
“A bigger issue for SA property stocks is the impact a Brexit has on Eastern European politics and economies. Those periphery EU members are most at risk from a large-scale break-up of the EU. There is no question that other EU member states will be forced to hold their own referendums over the next 12 to 18 months.”
Property companies that have sizeable investments in Central and Eastern Europe include Redefine Properties, Tower Property, Hyprop Investments and New Europe Property Fund.