You are currently viewing our desktop site, do you want to download our app instead?
Moneyweb Android App Moneyweb iOS App Moneyweb Mobile Web App

NEW SENS search and JSE share prices

More about the app

Is there hope for SA Reits?

Listed property trends in 2021.
Image: Shutterstock

Over the past three years, the property sector has found itself in a tough and volatile space. The past 12 months particularly, have been the most difficult. Still, this sector has demonstrated unimaginable resilience. While the asset class has declined from R600 billion market cap to R220 billion, it has also gone through massive re-pricing.

Investment case for local real estate investment trusts (Reits) in the current environment

Most credible industry players are forecasting forward funds available (FAD) yield of 10.7% for the sector, despite the weak property fundamentals in the short term and a four-year FAD growth of -0.54%. Some of the fund managers’ underlying assumptions remain conservative with no meaningful recovery expected in 2021. While factoring in a 2022 recovery, they do not anticipate earnings will reach 2019 earnings levels in the short to medium term.

On the positive side, recent company results have been encouraging with reported earnings and forward earnings guidance ahead of forecasts, albeit coming off a low base. The ALPI is still trading at a significant discount to the net asset value of 28.5%. Total returns for the sector in the short to medium term will be positive subject to economic conditions not worsening, and with the successful roll-out of Covid-19 vaccines, the fund managers are forecasting five-year annualised returns of between 14% and 17%. In addition, companies have built significant cash buffers to fund growth into the future and have thrown everything at rebasing earnings (buying opportunity) at the lowest point in the earnings cycle.

However, they remain cautious of risks facing the sector in the short term, including a possible third wave of Covid-19 infections in South Africa and have allowed for additional tenant relief and concessions in forecasts. Low interest rates will provide some respite for South African real estate investment trusts (SA Reits) in the short term, but it is anticipated that debt costs will move out over the longer term. What has been encouraging, is the resumption of dividends and improvements in Loan to Values (LTVs) due to the preservation of capital in the form of lowered payout ratios, increased disposal programmes and the introduction of reinvestment options by some REITs.

Future of SA property given the changes and acceleration of ‘new norms’ 

South Africa’s economy is under immense strain and will continue to be under pressure over the next few years. Loss of businesses due to the bad economy will have a deeper impact than working from home, so SA can’t really be compared to global markets. Ecommerce penetration in the country is still significantly lower than that evidenced in developed markets and due to structural challenges faced by the country, online sales do not make up a material percentage of total retail sales.

It is the common view that the new normal for retail will be omni-channel led, where bricks and mortar landlords work hand in hand with online and eCommerce platforms. It is important to highlight that we have allowed for a marked increase in online sales penetration in our SA retail sales forecasts as different retail categories and formats will be impacted differently by the acceleration of online sales. Traditional retail assets, notably smaller convenience, township-based malls and rural retailers continue to show resilient performance amid a subdued economy. This has been supported by a strong demand for essential goods and services, while omni-channel and eCommerce penetration levels remain limited in rural and township areas.

The omni-channel shift has been more prevalent in metropolitan nodes and has subsequently seen numerous larger format retail assets in these areas underperform. With that said, well-located, high-quality super regional shopping centres have recovered particularly well from the slowdown in sales during the second half of 2020.

WFH

Work from home (WFH) is a trend that is continuously evolving and difficult to extrapolate as to the actual impact on the office subsector over the long term. We are seeing tenants consolidating and reducing office space requirements. The current weak macro-environment and uncertainties related to when businesses will go back to the office, continues to put pressure on the subsector. The long-term expectations are that demand for offices will reduce and have a negative impact on any recovery in office market rentals. Generally, market rental growth assumptions for the office subsector are conservative and the subsector may take the longest to recover from the impact of the pandemic. One positive for the sector however, is that the sharp slowdown in development activity and an increase in the alternative use of office space has eased pressure of the oversupplied sector to some degree.

Is it time to bet the farm?

The SA Reits has a substantial discount to NAV and it is attractively priced relative to other classes. The sector offers an attractive yield and has potential for further re-rating once we revert to a normalised operating environment. The asset class provides diversification in a balanced portfolio context (volatility in between equities and bonds). Most asset allocators are neutral on the sector, whereas others are happy to move up the risk curve on selected companies.

Thabo Hlangwani, analyst: Absa Multi Management.

COMMENTS   7

Sort by:
  • Oldest first
  • Newest first
  • Top voted

You must be signed in to comment.

SIGN IN SIGN UP

Are there any Reits left?

They all want the benefits of being a REIT but are not prepared to stick to the legislation.

In what parallel universe?

I personally think there might be some opportunities…

However you left out 2 major issues.
1. Ridiculous cost increases in municipal rates, taxes, etc
2. Eskom/power hikes.

The rate of electricity price increases has been a massive burden to tenants in all sectors, and therefore a huge pressure on rentals, renewals and the simple viability of many businesses.

I’ve had many a tenant who’s electricity bill has been more than their rent.

Love that people like you complain.. I made a killing on Vukile Property Fund (VKE) because of stupid complainers like you… Stop complaining and start making money

Yet another area where Government has ‘eaten’ the opportunity. The ANC, a parasite like no other in history.

Industrial and warehouse probably survived covid the best of the sectors. But even in that, business pushed pause button on expansion. there is a bit of action in people looking for less expensive than where they were. there is fairly good interest in the 500-1500 square space. There is NOTHING happening in the 2500-5000 category.

For office and commercial there must be a lot blood letting waiting as leases end. Companies are going to reconsider where they MUST be – different needs. Companies are going to downsize how much space they need by ⅔ in work from home. That process will take 2y roughly?

I am very glad to be invested at R2500/sqm in solid structures instead of these parks going up offering 12,000/sqm for tin wall factories. I have no idea how these sites will ever service and repay capital at a good return.

Most REIT are I think weighted toward office commercial retail. Tough future

From circa 2014/2015 (around Marikana event) and with (a Zuma clan) Mosebenzi Zwane as Min of Mining, very few asset managers wanted to touch SA Resources shares with a 10-foot pole. Quoted by many at the time as “SA’s most unloved sector”

And where are Resources companies today? Drowning in cash.

All comes down to cycles.

Is there a future for REITS you ask?
Well, all I can say, it must be SA’s most unloved sector at present.

End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR
BTC / USD

Podcasts

INSIDER SUBSCRIPTIONS APP VIDEOS RADIO / LISTEN LIVE SHOP OFFERS WEBINARS NEWSLETTERS TRENDING PORTFOLIO TOOL CPD HUB

Follow us:

Search Articles:
Click a Company: