SA’s listed property stages a comeback

Bond yields and recent market-pleasing company earnings provide the growth vector.

After a glacial start to the year for South Africa’s listed property sector – with the three-month long heavy sell-off of individual stocks – the sector is now on a good footing.

Listed property stocks continue to test new highs with the FTSE/JSE SA Listed Property (Sapy) Index touching 662 points in March, inching closer to the all-time record of 673 points (last seen in April 2015).

The sector has staged an impressive comeback since the sacking of Nhlanhla Nene as finance minister in December, which sent property prices crashing as investor confidence in SA waned.

At the time, increased political risk had been priced into listed property, sparking a wide sell-off in largely South African property companies. Offshore property companies were slightly spared given their hard currency exposure.

Industry players say listed property has recovered from the so-called Nenegate, restoring its status as the sector that typically outperforms equities, bonds and cash.

Sapy notched up a total return of about 8% for March, well ahead of the 4.4% posted by the JSE All Share Index (Alsi). So far this year, the Sapy Index has delivered total returns of about 10%, two times the rise of the ten-year government bonds (5%), while the Alsi posted 8%.

Says Momentum Asset Management head of property Nesi Chetty: “Most people are surprised at the extent of the outperformance [of listed property] given that people were expecting 2016 to be a softer year for the performance of the sector.”

A number of factors are at play for the sector’s exuberance, chief among them are bond yields that have fallen from 9.6% in January to 9%. This is always supportive of the listed property as the asset class and bond yields generally trend together over the long-term.

Grindrod Asset Management chief investment officer Ian Anderson says property companies have generally exceeded market expectations with regards to their dividend growth and prospects for the remainder of 2016 and 2017. This has also boosted the sector’s fortunes.

Some Property counters have declared double-digit dividend growth to income-chasing investors (See table below) despite weak economic growth, a potential downgrade of the country’s credit rating and rising interest rates – making property acquisitions more expensive.

Dividend growth

     
       

Company

Market capitilsaiton

Reporting period

Dividend per share growth

Growthpoint Properties

R69.5 billion

Interim

6%

Hyprop investments

R28.7 billion

Interim

13.4%

Fairvest Holdings

R1 billion

Interim

10.02%

Resilient Income Fund

R52.2 billion

Interim

25.2%

Fortress Income Fund B

R36.1 billion

Interim

101.2%

Rockcastle Global Real Estate

R34.2 billion

Full year

8.2%

Fortress Income Fund A

R17.2 billion

Interim

4.8%

SA Corporate Real Estate

R11 billion

Full year

10.8%

Emira Property Fund

R7.7 billion

Interim

8.8%

Texton Property Fund

R3.1 billion

Interim

15.3%

Tower Property Fund

R2 billion

Interim

7.6%

Hospitality A

R1. 5 billion

Interim

5%

Hospitality B

R432 million

Interim

85%

Mas Real Estate

R7.3 billion

Interim

97%

Capital and Regional

R9.5 billion

Full year

228%

New Europe Property Investments

R57.3 billion

Full year

19%

       
       

Source: Moneyweb, Catalyst Fund Managers. Market capitalisation figures quoted on April 1 17:05

Chetty says recent company results show that rentals are growing in real terms, with the exception of the retail sector as rental escalations are under pressure.

This has resulted in a number of South African property companies diversifying into offshore markets – where yields on properties are higher than the cost of debt.

Companies that have recently made a move offshore include Redefine Properties, which bought a 75% stake in Polish Echo Prime Properties; Tower Property Fund, Attacq and Hyprop Investments, which bought properties in Croatia; Texton Property Fund and Vukile Property Fund invested in the UK.

Latest figures from Stanlib show that 36% of the Sapy Index is exposed to foreign currency earnings, whereas the sector had no foreign exposure ten years ago.

Dividend growth and more allocations

It will likely be difficult for property companies to deliver inflation-beating distributions as the economy starts to bite. Chetty says growth distribution for 2015 came in at 12% (including foreign currency earnings), but the forecast for 2016 is 8% to 10%. 

In recent months South African fund managers have needed to grow their exposure to property which has historically been very low, says Anderson.  “A pullback in prices will encourage those investors who are underweight to start adding to their listed property exposure,” he tells Moneyweb.

At the time of writing share prices that have pulled back significantly over the past three months  include European play Schroder Real Estate (-17.7%), SA and UK-focused Texton Property Fund (-15.3%), UK- and Germany-focused Redefine International (-14.5%), residential-focused Indluplace Properties (-12.7%) and UK’s mall owner Intu Properties (-10.6%).

Trading at a forward yield of about 5.3%, listed property is viewed as being expensive, but is also at fair value when benchmarked against other asset classes.

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