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SA Reits: Performance, trends and outlook

Will the current strong performance continue?
Image: Peter Juelich/Bloomberg

South Africa’s listed property sector had a strong one-year performance, outperforming other asset classes including equities. Although the sector saw an impressive 65% one-year return as at November 11, 2021, and a 29.09% year-to-date performance, the fundamentals remain weak, and the sector is still performing at below pre-Covid levels.

While the sector enjoyed a multi-year bull run, it started falling in 2018, deteriorating even further in 2020 due to the impact of Covid-19. Certainly, this pandemic has brought a worldwide double-edged economic and health crisis, and it is far from over. Threats continue to emanate for the sector, especially Covid-19-sensitive subsectors, including the office sector.

Source: Bloomberg, Morningstar Direct, 11 November 2021

What has been driving this strong performance?

The sector is coming off a low base of 2020 and the outperformance is largely attributed to the following:

  • Recovery in economic activity has been stronger than expected, bolstered by a strong rand and commodity prices.
  • Expectations of a return to “normal” following the vaccination announcements in late 2020.
  • Liquidity from both debt and equity sources has been more robust than expected.
  • Resumption of dividend payments by most Reits has improved overall investor confidence and appetite.
  • Corporate action has provided share price support in the short term and opportunities to unlock value in a few names.

 Will the current performance continue?

It is difficult to say what the sector’s total returns in the short term will be, but most property fund managers are forecasting one-year forward dividend yield at circa 9% with growth in distributions forecasted at circa 12% due to the low base effect of Covid-19 in the historical numbers. They remain cautious of the risks facing the sector in the short term, including potential further lockdown restrictions and risks of additional rental relief and concessions to tenants.

Trends in the sector

  • Alternative real estate and repurposing. Given the level of oversupply, repurposing office to residential space would make the most sense, but office valuations are too high to justify a conversion, barring some opportunities in the Johannesburg or Pretoria CBDs. Some retail space has been converted to storage, but this is relatively small.
  • Flexible work (work from home). This remains an important theme globally. We have seen many corporates change the views that they held last year and begin to ask employees to return to the office. Concerns around collaboration, team culture and in some cases fading productivity levels, are some of the main reasons for this. Some surveys show that employers will allow one to two days per week of remote working.
  • eCommerce. Growing in importance locally, it has already impacted many urban malls. Still, there remains many obstacles, such as a lack of physical addresses for delivery in rural and online fraud, but the investment by many retailers into their eCommerce platforms is indicative of where the retailers see the growth opportunities. In addition, the increased investment into eCommerce capabilities and the need to optimise supply chains, have led to an increase in logistic space demand, both locally and internationally.
  • Environmental, Social and Governance factors remain relatively new and, in their infancy, making it difficult to project the overall impact on the sector. However, the increased spending and accelerated rollout of energy-efficient initiatives should help curb the cost increases seen in recent years, ultimately driving down the operating costs for most Reits. The Covid-19 pandemic has shifted the weight of attention to the “social” criteria in the sustainability framework in the short term. Research by the SA Reit Association (SAReit) estimates that approximately R3 billion of Covid-19-related rental relief was provided by the SA listed property sector. The quantum of relief provided was predominately in the latter part of 2020 and the beginning of 2021, with focus being on retaining tenants, keeping businesses open, and people healthy and employed.
  • Technology. In some operational businesses such as storage and multi-let industrial businesses, technology plays a key role in attracting tenants and in the signing of leases through their online platforms and data collection. This is a major differentiator for Stor-Age, Sirius and Stenprop. Some retail funds such as Vukile have invested in technology that collects and tracks shopper features and behaviour, allowing it to understand the footfall patterns, consumer preferences, etc. The use of smart technology in buildings is scarcely used and if so, is likely to be a tenant-specific requirement.

Outlook

In conclusion, most property fund managers believe that the sector is fairly valued and is overlooking several of the headwinds that the market is facing, primarily the economic backdrop and ever-weakening office market. The recent rally has been spurred on by generalists and offshore flows shifting their asset class calls, which they believe should correct. Once more people are vaccinated in the country and the pandemic is under control, there will be more value for property to continue to rebound.

Thabo Hlangwani, manager research analyst: Absa Multi Management.

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