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Listed property: The cost of Resilient jitters

The Cinderella story of listed property has come to a screeching halt but SA-focused stocks are staging a comeback.

The enduring rally of JSE real estate stocks has come to a spectacular end – with the SA-listed property index (Sapy) slumping by 21.47% in the first quarter of 2018 resulting in more than R200 billion wiped off the sector’s market capitalisation.

It’s not hard to see why the real estate sector, which has been described as the Cinderella of markets for its resilience and outperformance, has had a turbulent start to the year.

The unprecedented selloff in the share prices of Resilient Reit and its sister companies Fortress Reit, Nepi Rockcastle and Greenbay Properties, on the back of allegations that the companies use questionable accounting policies and related parties to artificially boost dividend payments, has weighed heavily on the real estate sector.

Read more: What is the Resilient stable accused of?

Fears that Resilient companies might be the next Steinhoff has placed their shares in the losers pile, each plunging between 46% and 72% in the first quarter of 2018. Having lost more than half of their value, Resilient and Fortress shares have been ejected from the JSE top 40.

And if the Resilient companies sneeze, the real estate sector catches a nasty cold as the four companies make up about 25% of the Sapy index’s value.  The Sapy index makes up the JSE’s 20 largest real estate stocks.

The total returns (income and capital growth) delivered by the Sapy index have plunged by 19.35% in the first quarter of 2018. This pales in comparison to the 8.7% and 1.7% growth in total returns delivered by SA-10-year government bonds and cash respectively over the same period.

A closer look at the performance of individual companies reveals a wide disparity between the sector’s winners and losers – with SA-focused property stocks emerging as winners and the loser’s position taken up by rand-hedges. This is a big trend reversal as local property stocks have for many years fallen out of favour with investors who’ve opted to invest in offshore property stocks when the rand was weak and amid heightened political uncertainty under the Jacob Zuma presidency.

In fact, there is a more than 50% difference between the best-performing stock (SA-focused residential property builder Balwin Properties) and worst performer (Resilient-linked mall owner Fortress (B shares)). See table below.

Top ten winners
Company SA- or offshore-focused Total return
Balwin Properties SA-focused 20.60%
Fairvest Holdings SA-focused 15.80%
Emira Property Fund Largely SA-focused 15.50%
Echo Polska Properties Offshore-focused 15.30%
Rebosis A shares Largely SA-focused 13.30%
Indluplace Properties SA-focused 11.70%
Arrowhead Properties SA-focused 10.80%
Accelerate Property Fund Largely SA-focused 9.70%
Octodec Limited SA-focused 8.50%
Redefine Properties Largely SA-focused 8.30%
Top ten losers
Fortress B SA-focused -71.80%
Resilient Reit SA-focused -66.90%
Greenbay Properties Offshore-focused -60.80%
NEPI Rockcastle Offshore-focused -46.20%
MAS Real Estate Offshore-focused -29.40%
New Frontier Properties Offshore-focused -20.60%
Intu Properties Offshore-focused -16.60%
Investec Australia Offshore-focused -16.30%
Capital & Counties Offshore-focused -14.40%
Fortress A SA-focused -13.80%
Source: Bloomberg

The Resilient group aside, the other worst performers are rand hedges including Europe-focused Mas Real Estate (-29.4%), UK-focused counters New Frontier Properties (-20.6%), Intu Properties (-16.6%), Capital and Counties (-14.4%) and Redefine International (-13.1%). Their losses are linked to the recent rand strength, ongoing uncertainty about the Brexit negotiations and the rising interest rate cycle in the UK and US.

Recovery of SA-focused property stocks

Market watchers say SA-focused property stocks might offer more value at the moment than long favoured offshore counters, as they offer higher total returns, trade at wide discounts to their net asset value (NAV) and offer high yields.

For example, the share prices of companies with large portfolios investing in SA-based office, industrial and retail properties including Texton Property Fund, Fairvest Property Holdings, Emira Property Fund, Arrowhead Property, Octodec Limited and SA Corporate Real Estate, are trading at discounts to their NAV of between 4% and 34%. Their share prices are trading at dividend yields of more than 9%, thanks to the selloff in share prices of Resilient companies.

Garreth Elston, an analyst at Golden Section Capital, said although SA-focused property stocks might look attractive in theory, there are still risks associated with a few stocks.

Even though the local political environment has changed with the election of Cyril Ramaphosa as president, Elston said the operating environment continues to be challenging for SA property stocks, some of which are facing high vacancy rates and low rental growth. He singled out pressures for office properties, which continue to face an unrelenting supply of office space, and shopping malls that are buckling under the pressure of muted consumer confidence and spending.

It is these persistent market challenges that have made it difficult for SA property companies to deliver inflation-beating dividend growth in recent years. “We have to see the new government deliver on economic growth, which will improve consumer spending and confidence. This will benefit malls as they’ll start to see higher trading densities [sales per square metre]. New businesses have to be formed to take up the supply of office spaces,” said Elston.

Ahmed Motara, the analyst at Stanlib, agreed with Elston. “We have yet to see the local operating environment improve materially and while SA sentiment is more positive than in recent years, property tends to be a late cycle GDP play and will benefit only once stronger GDP growth manifests in SA for a prolonged period of time,” said Motara. 

The recovery in the economy and consumer spending won’t happen overnight but when green shoots eventually materialise, Elston said SA property stocks could potentially outperform their offshore counterparts in the long term. 

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