South Africa’s listed property or real estate investment trust (Reit) sector has had somewhat of a lacklustre first quarter of 2022 from a market-cap perspective on the JSE, as well as in terms of total returns.
On the total returns front, the All Property Index (Alpi) ended the first quarter (to March 31 2022) down 1.6%, while the SA Property Index (Sapy) was down 1.3%.
For the period, SA equities delivered a total return of 3.8% in local currency terms, while SA bonds came in at 1.9% and SA cash came in at 1%.
This means that listed property was the worst-performing asset class for the first quarter of 2022.
It is however still early days in the year …
In this latest episode of The Property Pod on Moneyweb, we speak to Anton de Goede, portfolio manager covering listed property at Coronation Fund Managers, about the sector’s Q1 performance. He also shares his views on SA Reits that published results during the recent February/March reporting season.
Highlights of his interview appear below. You can also listen to the full podcast above or download it from iono, Spotify or Apple Podcasts.
Asset class total return performance YTD ending March 31, 2022
“The [listed property] sector gave a negative performance of minus 1.6% … You’re right there – 1% or 2% down if one looks at the Alpy, which is the index that we look at here at Coronation. [However], you must remember and put it within the context of last year.”
“Last year the sector gave more than a 30% total return, with an especially strong quarter-end in 2021 at a 8.4% return.”
“So I think initially there was just a bit of a breather that the sector or investors took to see where things can and should settle post-Covid, and therefore January and February , especially also within the backdrop of the geopolitical issues that we are seeing out of Europe, as well as the inflation scare and potential interest rates scare that one is seeing out of Europe, the US, and then potentially here as well.”
“All of that you’ve got to take in context of the performance of this past quarter.”
What about the fall in the Reit sector market cap for Q1 of this year?
“To be honest, a fall in market cap is not relevant here because you’ve got to look at it from a total return point of view, and when one receives a dividend during the quarter, of course that share price will then lower by the dividend that you received.”
“So therefore look at it from a total return perspective, because that’s what you are eventually going to receive as a shareholder if [you] held the shares throughout the quarter.”
Recent Reit results …
“If one looks at the more SA-focused names within the sector – and I’m excluding names like Nepi Rockcastle, MAS [Real Estate] or Lighthouse – if you look at the underlying earnings, those grew by around 5.5% year on year with the [recent] results season, and of course a much stronger dividend growth number of 8.3% that came through during the quarter.”
“I think what’s important to note there is that companies, initially through Covid, decided not to pay any dividends or they cut their dividend payout ratios. We are now seeing a return to a more normalised – although not 100% but still kind of a normalised – payout ratio going forward now that the uncertainties of Covid are not there anymore.”
“In terms of the results itself, to be honest, there was nothing that kind of stood out as stellar results.”
“I think results in general were kind of what the market expected. If you think of the underlying operations, we are continuing to see negative reversions. So when leases expire, tenants are signing more or less still at lower than the previous rents that expired [as] new leases.”
“That of course is being done to manage the vacancies and therefore we are seeing fairly okay vacancy management, especially on the retail and industrial or the logistics side. We continue to actually be a bit worried about office vacancies and the potential for office space demand going forward.”
“So, overall the results were more or less in line with expectations; there was nothing really being a positive standout in terms of the rest of the sector.”
What about some counters still not declaring dividends?
“According to JSE rules, companies don’t necessarily need to pay interim dividends. I think we’ve got used to the fact that, as Reit investors through the years, people pay half-year dividends as well. So if you look throughout the Covid crisis, companies that didn’t pay a half-year dividend eventually paid a full-year dividend, taking into account the earnings of the interim periods – or most counters did that.”
“In any event, according to Reit regulations, companies need to pay out at least 75% of distributable profit to qualify as a Reit …”
“We are not worried as investors if companies didn’t invest or didn’t pay out the interim dividends.”
“In any event, you’ve got to look over a three- or a five-year period, because then it will come through in the wash in terms of the total return prospects of the company.”
Turning to Vukile specifically – what are your thoughts the group upping their guidance last week?
“There are two things there that one needs to consider. First and foremost, operationally things are looking [good], and from reversions to vacancies and from a turnover growth point of view, tenants are doing well.
“That’s of course in the categories that they’re playing in in terms of their retail, which is much more convenience, rural commuter-type retail, where there’s an essential trading element to it where you’ve got grocers, and you’ve got pharmacies that are part of that tenant mix, which is important in terms of just providing a good underpin where we are looking at the current consumer spend.”
“But what also played a role in upping their guidance was the fact that they are increasing what they are paying out to investors.”
“In the past, if I remember correctly, they guided to a 65%, 70%-type payout ratio of their earnings, but they’ve upped that closer to 80%, if I remember correctly.
“So therefore, of course, the share price reacted positively because, as a shareholder, you’re going to get more cash in your hand due to that higher dividend.”
“As a South African Reit investor one needs to be cognisant of the offshore exposure that’s sitting within the sector. Of course, if you go back 10 years, there was very little offshore exposure and that offshore exposure has jumped substantially over the last 10 years.”
“A big portion of that offshore exposure is said to have been Central and Eastern Europe, and countries like Poland, as you mentioned, Romania, also some Hungary, some Bulgaria, some Serbia. So it’s a good mix within that region.”
“In terms of the geopolitical risk and the potential impact, one can’t say exactly what’s going to happen out of the Ukraine and out of Russia and how things will transpire.”
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“But one needs to be cognisant of consumer sentiment, consumer demand and how it may impact retail sales, because that is where the bulk of the exposure sits up in our sector on that Central Eastern European exposure. If there’s a war on your doorstep, do you still want to spend [as] much as you would have as a consumer? To be honest, I doubt that.”
“So I think that is key – one needs to be looking at the historical strong consumer spend that was driving rentals and tenant demand in that region. Will that falter in the short- or medium term, or will it have an impact on that consumer demand?”
* To listen to the full interview, click here.