The Cinderella of markets is losing its sparkle

It’s becoming increasingly difficult to pick gems in SA’s more than R350 billion listed property sector in recent months given the volatility in global markets and domestically, the pesky rand.

Over the past ten years, listed property has been consistent in delivering above-inflation returns and outperformed equities (the JSE’s all share index) and even bonds (ten-year government bond).

But all market darlings fall from glory, and the South African Listed Property Index (Sapy), which includes the JSE’s largest 20 real estate companies, seems to be the latest to do so.

The Sapy index has delivered total returns of 9.9% (at the time of writing) in the year to October 25, figures from Stanlib show. However, bonds are proving to be a far better bet for income-chasing investors than listed property, delivering total returns of 15.1% while equities are the laggard with total returns of 4.5%.

Higher bond yields, which have risen to nearly 9% in a matter of weeks, is one of the reasons behind the swing in listed property, as the asset class is sensitive to bond yields movements.

You don’t have to look far for reasons behind the ructions in the bond market: political uncertainty that has heightened the likelihood of a downgrade to SA’s sovereign credit rating in December and the possibility that US interest rates might rise.

Grindrod Asset Management’s chief investment officer Ian Anderson says an obvious reason impacting the property index has been the strength of the rand.

The strength of the local unit (by 11% so far this year) is bad news for offshore property companies as they are more sensitive to rand movements than their SA-focused peers. Anderson says about 40% of the index is exposed to offshore markets, largely in Central and Eastern Europe. Ten years ago, the sector had no exposure to international markets.

Industry players expect that three more offshore companies – mainly Germany-focused Sirius Real Estate, Europe-focused Greenbay Properties and Poland play Echo Polska Properties – to be included into the Sapy index at the expense of Christo Wiese’s Tradehold, Octodec Investments and Accelerate Property Fund that might be bumped off the index in December (See composition of Sapy Index below).

FTSE/JSE SA Listed Property (SAPY)
Company	Jurisdiction	Index Weight (%)	Market cap (R Billion)
Growthpoint Properties	South Africa-focused	19.16	72.6
Redefine Properties	South Africa-focused	14.73	58.0
New Europe Property Investment	Offshore-focused	10.90	53.3
Resilient REIT	South Africa- focused	8.76	42.2
Hyprop Investments	South Africa-focused	8.35	29.8
Fortress Income Fund B	South Africa- focused	6.36	32.5
Fortress Income Fund A	South Africa- focused	5.0	18.4
Rockcastle Global Real Estate Co	Offshore-focused	4.71	34.9
SA Corporate Real Estate Fund	South Africa-focused	3.53	13.4
Vukile Property Fund	South Africa-focused	3.34	12.8
Attacq Limited	South Africa-focused	2.94	12.9
Arrowhead Properties	South Africa-focused	2.29	8.8
Investec Property Fund	South Africa-focused	1.79	6.4
Emira Property Fund	South Africa-focused	1.73	7.1
Rebosis Property Fund	South Africa-focused	1.36	6.1
MAS Real Estate	Offshore-focused	1.19	8.2
Pivotal Fund	South Africa-focused	1.06	5.5
Accelerate Property Fund	South Africa-focused	1.04	5.5
Octodec Investments	South Africa-focused	0.95	5.5
Stenprop Ltd	Offshore-focused	0.41	5.6
Tradehold	Offshore-focused	0.41	4.1

Some SA-focused companies are also invested in offshore markets.

Source: Grindrod Asset Management and Moneyweb.

Offshore counters hammered

Although offshore property counters were the among best performers last year, their sparkle has since dimmed. In fact, there is a big variance in the total returns posted by individual offshore stocks, which have been the losers and local property stocks that have claimed the top spot.

For example, commercial and residential property company SA Corporate Real Estate Fund and the owner of hotel properties Hospitality-B have emerged as the top winners, delivering total returns of 32% and 31% respectively in the year to October 25 (See graph below).

Listed property
Top winners – year to date (October 25)
Company	Jurisdiction	Total returns (%)
Hospitality-B	South Africa-focused	31
SA Corporate Real Estate Fund	South Africa-focused	32
Hyprop Investments	South Africa-focused	24
Rebosis Property Fund	South Africa-focused	22
Redefine Properties	South Africa-focused	18

Top losers – year to date (October 25)
Capital & Counties Properties	Offshore-focused	-52
Capital and Regional	Offshore-focused	-33
Redefine International	Offshore-focused	-33
Atlantic Leaf	Offshore-focused	-32
Intu Properties	Offshore-focused	-32

Source: Moneyweb

UK-focused Capital & Counties Properties’ (Capco) total returns have slid by 52%, cementing it as a top loser. Capco – a long favoured rand-hedge property stock by punters – has emerged as a casualty from the UK’s glum economic prospects following the Brexit vote, with jittery investors aggressively selling down the company’s stock since June.

Even some local counters are feeling the pinch with some of the losers including, Freedom Property Fund (-46%), Balwin Properties (-17%), Attacq Limited (-6.8%) and Acsion Limited (-5.58%). Catalyst Fund Managers portfolio manager Zayd Sulaiman says the showing by these companies is linked to poor fundamentals in the SA’s property sector.

“There is an oversupply of office space. Consumers are under pressure and the retail sector is also coming under pressure with a lot of retail schemes brought on stream recently. It is difficult to develop in SA as the demand for properties and space from tenants is declining,” he says.

Stock picks

The big question is where market watchers are finding value in the sector. For Liliane Barnard, the CEO Metope Investment Managers, it’s all about company fundamentals.

“We look to identify companies that have good assets and clear strategies for long-term growth: who can deliver income and capital growth throughout the cycle – and not just taking advantage of currently low funding rates offshore, which comes at the expense of growth in income.”

As far as hitching your wagons in markets beyond SA, she says investors need to assess offshore property companies on a case-by-case basis. Going offshore, after all, brings a different set of risks such as currency fluctuations, which can impact rand-based earrings, and exposure to unfamiliar economies.

“South African managers that invest offshore need to show a thorough understanding and/or a competitive advantage in these markets in order to justify their investments in these jurisdictions,” Barnard tells Moneyweb

Grindrod Asset Management still finds value in SA-focused listed property companies, which are trading at discounts to net asset value (NAV) and “very attractive initial income yields,” says Anderson. “While some of these companies have also started venturing offshore, their smaller size and limited liquidity has meant that they have attracted little or no institutional support and therefore they still offer exceptional value,” he says.

The head of property at MMI Investments & Savings Nesi Chetty favours Hyprop Investments, the owner of shopping malls including Johannesburg-based Hyde Park Corner, Rosebank Mall, Canal Walk Shopping Centre in Cape Town, and others.

It has delivered total returns of 24% in the year to October 25.

Chetty backs Hyprop due to its quality retail property portfolio and “good re-valuations in their portfolio.” He adds that large shares such as Hyprop are owned by a number of foreign investors and are the first to feel the pain when investors are jittery about SA.

Chetty also finds value in mid-cap Emira Property Fund, Germany-focused Sirius Real Estate and last year’s top performing stock Fortress B given their growing and transforming property portfolios.

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When large assets don’t swap hands, and when the creative destruction in the wake of the Sub-prime crisis didn’t happen, and when the retailers have been selling to more than 10m extra illegal immigrants you could forgive Cinderella’s ‘carriage’ for taking 8 more years to turn into a pumpkin.