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There’s potential for strong recovery in some property counters

However, Metope CEO Liliane Barnard expects volatility in the sector to remain.
The sector has shown its resilience, even providing close to R3bn in direct support to tenants, a number possibly not fully appreciated by the market. Image: Shutterstock

Over the three years to the end of February 2021, the Metope Property Prescient fund returned -10.3% per annum. This places it in the top quartile of property funds over this period.

The average annualised return from funds in the Asisa South Africa real estate general category over 36 months has been -13.2%.

More recently, however, the fund has not gained as much even though local property stocks have bounced off their lows.

The Metope Property Prescient fund has gained 12.5% in the three months since the start of December. The category average for this period is 16.8%.

Renewed interest

Portfolio manager and Metope CEO, Liliane Barnard, expects volatility in the sector will remain high for a while.

“We see surges in price increases when money comes into the sector, and then these surges decline a bit when the demand for shares lessens,” Barnard said.

Her view is that the renewed interest in the sector will continue as investors gain comfort in a number of factors:

  • “That the worst of Covid is behind us;
  • “That property companies have successfully navigated the biggest crisis in 100 years and have not fallen over, as some investors predicted due to liquidity crunches;
  • “These companies are highly cash generative;
  • “There is an income yield which will increase over time, despite weakening property fundamentals, as companies recover from Covid business weakness and gradually adopt higher pay-out ratios; and
  • “There is a substantial discount to NAV [net asset value].”

Unloved counters

In the short term, the most liquid counters, particularly Growthpoint and Redefine, are the ones benefiting the most as the sector recovers.

“The more unloved shares tend to remain behind, but eventually the rising tide lifts all counters,” said Barnard.

“As we see it, there are a number of counters that will still show good strong recovery in share prices, a doubling at least, without there being a rerating of the sector overall, even as sovereign risks possibly lessen.”

The Metope fund has not benefitted as much in the recent rally as its portfolio looks very different to the index.

Growthpoint and Redefine do not even appear in its top 10. Among its largest positions are EPP, Equites, Fortress-A, Fairvest, MAS and NEPI Rockcastle.

Discount to NAV

“This is a concentrated fund and is currently positioned to capture a recovery from the hard-hit South African counters as well as being exposed to offshore property markets, especially Central and Eastern Europe,” Barnard said. “There is also a focus on the more resilient sectors such as logistics and storage, which provide a solid income base for the fund.”

Barnard added that the fund is concentrating on those counters that currently trade at historically high discounts to NAV.

“We are long-term investors, and we base our investment decisions on our bottom-up fundamental research that we do on each stock in our universe. We look for companies where management has a clear deliverable asset management strategy for the underlying portfolio, where the growth in income is stronger than the market average, and where the balance sheet is well managed. This approach has enabled us to find the outperformers and avoid certain stocks.”

Navigating risks

Lockdowns undoubtedly increased risks in the sector overall, and Barnard added that the fund pays a lot of attention to where the biggest risks might lie.

“In the current environment of falling property values, companies with higher debt levels and no clear strategy of how to reduce debt face the potential of increased financial risks on debt expiry,” she said. “Any debt rollover is now possibly accompanied by higher margins, or increased security or equity required. Being able to identify those companies that are agile and strong enough to navigate the identified risks is really key.”

The investible universe, in Barnard’s view, is however looking better than it has in recent years as the financial metrics of many companies are now ‘cleaner’ and the discounts to NAV on offer are attractive.

“We have gone through an incredibly difficult period these past 36 months, and particularly the past 12 months, and the sector has demonstrated its resilience,” she said. “It has provided close to R3 billion in direct support to tenants, which is a huge number and possibly not fully appreciated by the market.

“Shares are being priced largely on dividend yields – in other words what is actually received in the hands of the shareholder and not necessarily priced on the full earnings or funds from operations that the business can generate. This retained income remains in the business, however, and can be used to pay down debt and strengthen the balance sheet, thus boosting NAV.”

Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.

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Interesting but isnt property valuation mainly driven off long term bond yields? So if the fiscal cliff comes closer, yields go up as we are downgraded further then surely listed property stocks will fall.

Bit of both… Long term bonds yes, but also (traditionally) of dividend yields as that’s the main reason people bought property stocks.

Decent yields generally meant nice recurring annual incomes and then some share growth because property values increased.

2007/8 and 2020 showed that isn’t a given!

Property counters should not be measured in against 2019 figures, they are still overpriced.

So someone i”in property” talking up a beleaguered market. I’m not buying it. When you really look what has happened to this country since 1994, one has to ask “Better?????”

End of comments.

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