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Opportunity is again knocking in the listed property sector

Earnings are improving.

The listed property sector, an investment darling for many years, seems to be turning a corner after share prices were knocked quite severely in the past 18 months.

The quality of earnings is improving, mainly because of a clean-up following a period in which earnings were propped up in an attempt to “keep up with the Joneses”, says Kundayi Munzara, co-founder and executive director of Sesfikile Capital.

Speaking at the Allan Gray Investment Summit in Johannesburg, Munzara said from 2015 to 2017 companies were taking cash offshore and engaging in activities that would turn capital into income.

Many invested their cash in the UK and Eastern Europe. However, the UK is currently faced with the consequences of a possible hard exit from the European Union.

“The real issue in UK retail has been online shopping, which makes up 20% of retail sales,” says Munzara, adding that online shopping makes up 11% of retail sales in the US, 8% in Europe, 6% in Japan and only 2% in SA. “E-commerce has penetrated and decimated the [UK] market.”

Continued need for a physical presence

Although e-commerce has been growing rapidly, the rate of growth will start to decline. The main reason for this is the continued need for a physical presence or space, although perhaps not as much space as before.

Eastern Europe countries have experienced stronger economic growth than those in the West. South African companies that have invested in countries like Poland have done quite well.

“They have gone into markets where the macros [macro-economic environments] are super-supportive.” The penetration of e-commerce has not been as prolific in countries like Poland (at 5.5%) compared to the UK’s 20%.

Consumer patterns have also changed. People used to buy ‘stuff’ but now they are buying ‘experiences’. The shopping centre environment has evolved because of that.

SA sector affected by the three Es

In South Africa a lot of effort has gone into cleaning up earnings, but the sector is still faced with specific risks which Munzara calls the three Es – Edcon, Eskom and the election.

Edcon is one of the biggest retailers and tenants in SA and when it fell on hard times a lot of listed property companies were affected.

However, in the first quarter of this year it met with several of the largest landlords and negotiated a 41% reduction in rental rates for at least two years.

The sector took the view that it could not allow one of SA’s largest retailers to go under, and that it might as well take the 41% drop in rental income on the chin.

Munzara says it is inevitable that other large retailers may also push for reduced rates when the time to renegotiate their lease agreements comes.

South Africa is not, by a long shot, out of the woods in terms of its energy crisis. Load shedding and unpredictable energy supply from Eskom has had a severe impact on the country’s financial position, and has also affected the operational side of businesses.

Wait-and-see approach might be over?

Munzara says the election has been “largely market-friendly”. However, in the five months prior to the election in May everyone adopted a wait-and-see approach to investing, signing contracts, expanding and doing any upgrades.

The retail sector currently finds itself in a difficult position, with an oversupply of shopping malls – especially in Gauteng. Vacancies are set to rise and in addition to that some local retailers are starting to shrink their footprint.

“Some of the international retailers, which we expected to rescue us, pulled back because they have their own issues in their own backyards.”

The office sector has been in a recession for what feels like forever, with vacancies ranging between 10% and 13%.

Munzara says it is quite encouraging that many of the new office buildings are already pre-let and that there are few new developments on the horizon, which means that supply is starting to dissipate.

In the industrial sector vacancies are around 6.4%. A lot of companies have upgraded to A-grade logistics warehouses, which have a vacancy rate of between 2.5% and 3%.

“That is really the market you want to be in at this point, and it is a market that we are quite confident about,” says Munzara.

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Offshore maybe.

Local. Haha. They can talk all they like.

Let me understand your point, are you saying a local fund manager specialising in listed property much talk about offshore investing at an investment summit?

The flow of money recocgises the destructive effect of ANC policies especially BEE.

The engine is revving, but the handbrake is up. Each increase in the value of a property will be followed by an increase in rates and taxes. The equity is syphoned off through socialist redistributive rates and taxes. The property investor is volunteering to be appropriated without compensation. The ANC takes 30% of your business through BEE laws, then they take the capital appreciation through municipal tax laws and if there is anything left, they appropriate it through the cost of electricity, labour and income tax.

“When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.” ― Frédéric Bastiat

“….but the handbrake is up”! Again, what a brilliant and refreshing way to start your comments, Sensei

…the only people making money in such environment, are those replacing clutches and tyres 😉 (…and so long you pay the VAT on the deal to the govt, and the 200% inflated price due to effects of using a mandatory BEE supplier).

The latter one of the reasons why life is (relatively) expensive in SA.

Following hot on the heels of revaluation of Johannesburg properties we now have increases on services.

Yet again another audit from SARS, they probably want to know why I declared lower property income.

In the meantime we have service delivery protests where police stand by and observe “protesters” commit acts of vandalism, hurling objects at motorists and firing weapons into the air. So tolerant, makes any property owner want to puke.

The last time we had value in property was in the 80’s or was it the Rinderpest – now your property valuations escalate dependent on how much the metros/municipalities lost to fraud, corruption, and bloated employee numbers.

There is a bigger than Steinhoff slap to valuations overdue in listed property. Not my problem, just saying

Just sold my warehouse in Cape Town last week after i couldnt find a lease for over a year and the sale took 5 months before a semi decent bid came in. Whilst this was happening the City of CT decided to up my building valuation from R2.6mill to R7.2 mill. Rates and taxes are now out of control I barely got R5 mill for the property after it being listed for nearly a year.

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