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Why have listed property stocks faltered?

Blame it on the worrying state of the SA economy and politics.

Listed property, a front-runner asset class on the JSE in recent years, has emerged as a laggard on the back of growing volatility in share prices.

The SA Listed Property Index (Sapy), which makes up the JSE’s 20 largest real estate stocks, has barely kept up with the total returns posted by ten-year government bonds, the JSE All Share index (Alsi) and cash over the past six and 12 months.

Property stocks are down 3.3% in the year to June 30, with the Sapy Index delivering paltry total returns (income and capital growth) of 2.29% compared with the 4.02% posted by bonds, 3.74% and 3.37% amassed by cash and Alsi respectively over the same period. Over a 12-month period, the sector is up 2.8% (see below).

Source: Catalyst Fund Managers

The selldown in property stocks is not entirely surprising given the large swings in the rand exchange rate and bond yields, which have been impacted by the worrying state of the economy and increasing political uncertainty.

SA bond yields have stabilised so far this year between 8.8% and 8.9%, but these levels haven’t had a positive spinoff for property prices.

Another reason for the slow returns of listed property is the sector’s growing exposure to offshore markets in recent years, said Catalyst Fund Managers investment manager Paul Duncan.

Over the last two years, no fewer than 12 offshore property companies listed on the JSE while SA-focused property companies aggressively concluded international deals.

The big drawcard to offshore markets by SA-focused companies has been low interest rates (on average 3%), higher yields on properties (more than 7%) and rand-hedge earnings, which artificially boosts dividend payouts to investors in year one.

Now that the rand is showing relative strength to the US dollar, Duncan believes that several property companies might be hit hard.

Offshore counters, which are also part of the Sapy Index, are more sensitive to rand exchange rate movements than their SA-focused property counterparts and a strong rand negatively impacts total returns and share prices.

“It [the strength of rand] is going to start having a negative impact, off the high base previously seen in property company earnings. This is reflective in the performance of share prices as investors are anticipating negative earnings surprises,” Duncan said.

A look at individual property stocks reveals that the best-performing stocks for the year to July 11 2017, are mostly SA-focused ones that amass the bulk of earnings from their local office, retail and industrial property portfolios. The big losers include pure offshore counters and those that have a combination of SA property portfolio and substantial offshore exposure (see below).

Best performers (total return – year to July 11)  
Company  Total return Share price movement (6 months)
Sirius Real Estate (Offshore) 29% 23.45%
Greenbay Properties (Offshore) 24% 23.42%
Equites Property Fund (SA-focused)  18% 12.5%
Fortress Income Fund B shares (SA-focused) 14% 6.21%
Gemgrow Properties (SA-focused) 13% 7.37%
     
Worst performers     
Liberty Two Degrees (SA-focused) -9% (9.52%)
Balwin Properties (SA-focused) -10% (9.85%)
Accelerate Property Fund (SA-focused) -22% (18.03%)
Growthpoint Properties (SA-focused) (0.23%) (-6.4)
Redefine Properties (SA-focused) (1.3%) (7.14%)

Source: Stanlib, Moneyweb

Among the winners is industrial-focused property company Equites Property Fund and hybrid property company Fortress Income Fund B-shares, which notched up a total return of 18% and 14% respectively in the year to July 11.

On the loser’s pile are sector heavyweights Redefine Properties and Growthpoint Properties, which delivered a negative total return of 1.28% and 0.23% respectively.

Ahmed Motara, portfolio manager at Stanlib, said the underperformance of Redefine and Growthpoint dragged the Sapy index total returns given their significant weighting on the index. “How can the Sapy Index trade up, when none of the big weights are moving materially positive?” he asked.

The big question is where are property analysts finding value in a market fraught with volatility and declining dividend growth.

On the latter, investment analyst at Metope Investment Managers Kelly Hook said the decrease in the premium of listed property relative to bonds to 30% from the peak of nearly 45% in 2016, suggests that investors expect lower income growth as “several funds have guided towards flat or reduced dividend growth forecasts”.

Inflation-beating dividend growth of 10% to 12% from property companies appears to be a thing of the past, as most analysts expect dividend growth of below 9%.

Is there still value in offshore property stocks? Hook said Metope Investment Managers finds value in offshore stocks that offer strong and sustainable income growth and have a competitive advantage in the markets they operate in.

Ahmed supported Hook adding that offshore stocks that have strong offshore growth dynamics could offset currency volatility. “If you anticipate the rand to weaken at some point you may see a massive acceleration in the rand share price, but this is not something you should factor into your investment thesis.”

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The crisis that started in 2008 is not reflected in the listed property stocks as their assets did not change hands, but now the truth eventually emerges:
– The SA economy in recession;
– The SA consumer in a difficult position;
– SA is overtraded in retail space.

Listed property just doesn’t make sense to me.

It is still a stock on a stock exchange. It does not align to the value of the property.

The returns should be measured by the dividends as that should be distributed income from the held properties.

Unfortunately, people are conned into listed property under the impression that it is just property held in a fund where it is not.

You make me feel like a Fort Hare graduate. I have read your post 5 times now and I still don’t understand what you are saying. Now i am getting to the point where I want to decolonize you.

What is your understanding of listed property?

My understanding of listed property is that it is the most sophisticated way to own physical property. If you want to be an owner of The V&A Waterfront of Canal Walk shopping center, buy Growthpoint or Hyprop. Listed property offers the advantages of liquidity, good management teams, transaction cost lower than 10% of physical property and gearing if you want it.

The investor who prefers physical- over listed property is the one who loves fixing geysers over weekends, enjoys paying commissions and transfer fees and likes to spend time in court with tenants.

The only reason why I do not own JSE-listed property at the moment is because there are better alternatives that are also listed on exchanges worldwide.

Now please give me your understanding of listed property.

I already did in my comment above.

My 9 properties that I own have given me far bigger returns over the past 5 years than any listed property.

Why would I want listed property?

I am happy for you my friend. I should watch what I say, you could be my landlord.

Perhaps a little of both is also a fair comment Sparky. Geysers on Saturday and a dividend on Wednesday . .. that was my idea.

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