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Offshore property stocks come out on top

The worrying state of the economy and political ructions weigh on local stocks.

Offshore real estate stocks have emerged as the best performers so far this year compared to SA-focused stocks that face a precarious outlook given the worrying state of the economy.

The SA listed property index (Sapy), which makes up the JSE’s 20 largest real estate stocks, has delivered total returns of 10.5% in the year to November 27, according to latest figures by Stanlib.

The Sapy index has in recent months seen the inclusion of offshore counters and hybrid counters (with SA and offshore exposure), at the expense of pure SA-focused real estate stocks, helping it to deliver positive total returns.

A closer look at the performance of individual companies reveals that the sector’s winners are largely offshore stocks while SA-focused stocks dominate the losers pile.

Europe- and UK-focused Greenbay Properties comes out tops with a total return of 68% in the year to November 27, followed by Germany-focused Sirius Real Estate (57%), Europe-focused MAS Real Estate (47%), and UK-focused Atlantic Leaf Properties (26.5%).

In contrast, the losers are mostly companies that generate the bulk of their earnings from SA-based office, retail, industrial and residential properties. This includes Balwin Properties, shedding a hefty 34.3% in total returns, Arrowhead Properties (-27%), Accelerate Property Fund (-26.5%) and Octodec Investments (-23.4%).

Not all SA-focused companies are in the doldrum, with industrial sector-focused Equites Property Fund and self-storage property fund Stor-Age posting positive total returns of 29.7% and 16.5% respectively. 

Investor concerns about the domestic economy came to a head when a number of SA-focused companies recently posted results in which rental reversions on their property portfolios were either flat or negative and vacancies increased, resulting in slashed dividend growth forecasts.

Sector heavyweights Growthpoint Properties and Redefine Properties shocked investors by revealing that their dividend growth would grow by 5% to 6% in 2018, which might be negative after factoring inflation.

Read: Another year of slashed dividends for property investors

Other counters that are in a similar boat include Delta Property Fund and Octodec Investments, who expect zero growth in dividends, while Arrowhead Properties expects dividends to decline by 6.5%.

The share prices of local counters are down between 5% and 29% in the year to November 28 compared with their offshore counterparts that are up between 4% to 68%.

Currency swings

A key driver in the outperformance of offshore real estate companies is rand exchange movements. A weak rand against the euro (companies report their results in euros or have European operations) of 14% year-to-date has helped boost the share prices and earnings of offshore counters.

Another is low interest rates and higher yields on property developments or acquisitions, which boosts earnings, said Ahmed Motara, a portfolio manager at Stanlib. “This is a driver of strong earnings growth for the offshore companies, in many instances above the earnings growth that companies with largely South African portfolios can achieve,” said Motara.   

The deterioration of the domestic economy and political climate has prompted SA-focused real estate companies to search for offshore opportunities, said Anas Madhi, an executive director of Meago Asset Managers. The search has pointed SA-focused real estate companies to conclude acquisitions in Central and Eastern Europe (CEE) regions in countries like Poland and Romania.

More than 40% of  the Sapy Index is exposed to foreign currency earnings, whereas the sector had no foreign exposure ten years ago, according to Stanlib.

Source: Stanlib

Kelly Hook, investment analyst at Metope Investment Managers, said Poland and Romania have the largest populations in CEE regions and compelling macroeconomic fundamentals “to support the growth South Africans are seeking”.

Hook said GDP growth in Poland and Romania is expected to be between 4% and 5% in 2017 respectively, slowing to 3.5% and 3.7% respectively in 2018. These forecasts are substantially higher than the 0.7% GDP growth in 2017 and 1.3% in 2018 for SA.

Hook said increased employment and higher wages in Poland and Romania has a positive knock-on effect for the retail sector, which would benefit stocks like Nepi Rockcastle, MAS Real Estate, and Echo Polska.

The fact that offshore counters are the best performers doesn’t necessarily mean that they are good bets. Stanlib’s Motara said investors must have a good understanding of a company’s property portfolio quality, management team and the dynamics of the country it operates in. “We are wary of investing in property companies that are merely engaged in financial engineering to generate earnings growth, without the property portfolio dynamics to support sustainable earnings growth.”

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wouldn’t touch these with the proverbial barge pole! no liquidity – questionable investments esp in eastern Europe – fees on fees!! no its naspers for me (if I were invested in sa – which I’m not)

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