South Africa’s real estate investment trust (Reit) sector has gone from being the worst-performing asset class last year to the best-performing one so far this year.
The FTSE/JSE South African Listed Property Index (Sapy) was up 9.17% in January after a torrid 2018, which saw the sector slide -25%.
Sapy comprises the top 20 most liquid Reits by market cap with a primary listing on the JSE. The sector’s strong comeback in January saw it outperform the FTSE/JSE All Share Index (Alsi) at 2.69% growth, with bonds at 1.7% and cash at just 0.6%.
The South African Reit Association, an industry body that represents SA’s R330 billion listed Reit sector, said in a statement this week that this was the sector’s strongest January performance in over a decade. Now it’s betting on a rerating of the listed property sector with the recovery anticipated to gain momentum into 2020.
Nesi Chetty, head of Property Investments at Momentum, is bullish about expectations for the sector this year, telling Moneyweb he believes a total return of 15% to 20% is possible.
“This would be a significant rerating of the sector. People are already buying in anticipation of the growth prospects, despite caution around the upcoming national elections and the impact of Edcon on retail property. While it may not reach the highs of 2016 and 2017, the capital markets are likely to also perform better this year, with the sector certainly set to raise more capital than it did last year,” he says.
On interest rates, Chetty says that with the rand strengthening inflation is likely to remain around the 4.5% mark, therefore rates would likely hold steady. “Only deep into a rate hike cycle will listed property underperform cash,” he notes.
Chetty adds: “The sector’s strong performance in January will have a positive sentiment effect, but a rerating will also depend on whether listed property companies deliver on distribution guidance this year. It may turn out to be a two-year rerating period for the sector.”
Optimism ‘possibly premature’
Garreth Elston, a portfolio manager at Reitway Global, is less optimistic. He says that just looking at the increase in share prices for the first month of 2019 could be seen to be premature, given that SA Reits have not yet entered the earnings season.
“It is highly unlikely that most Reits will be delivering exciting results for the 2018 financial year given the lack of real economic growth, consumer stress, recent rate hike, ongoing retailer issues, and oversupply issues. This also discounts any potential impact from Edcon that will have a major negative impact on many Reits,” he says.
Elston adds: “There has also not been an industry-wide readjustment of property values to take into account the economic stress, vacancies, and cash flow impacts. Additionally, it would not be a great surprise to see more Reits cutting their dividends going forward. If these two events happen in tandem there will be no rerating in 2019, and the industry will need to wait for positive catalysts to emerge.”
On the offshore front, he says investments should remain positive net income contributors and diversifiers. However, with the current rand strength and gradual slowing down of European economies, these investments will likely deliver less going forward.
Jury is still out
Howard Penny of Capricorn Fund Managers SA expects 2019 to be a better year overall for SA Reit returns, however, he says the jury is out as to whether the sector could rerate on a relative valuation level this year. “Given worries surrounding rising global interest rates, perhaps the bounce back may have to wait for 2020,” he says.
Keillen Ndlovu, head of Listed Property at Stanlib, expects total returns from the SA Reit sector to come in at around 9% to 10% for 2019.
“We saw a correction happen last year. Listed property was oversold in a very volatile market. While 2019 still has its challenges, I believe a rerating of the sector is in the works and 2020 will be a stronger year,” he says.
Wynand Smit, real estate analyst at Anchor Stockbrokers, says most SA Reits “derated” during 2018. “Should growth expectations start to improve during 2019, the valuations of the SA Reits are compelling,” he adds.
The top five performing Reits so far this year from a capital appreciation perspective, according to Anchor Stockbrokers, include Accelerate Property Fund (up 19.1%), Octodec Investments (16.2%), Resilient Reit (13.4%), Arrowhead Properties (13.2%) and Rebosis Property Fund (13.2%).