FIFI PETERS: South Africa’s listed property index has jumped over 16% since the start of the year, which is not too far behind what the JSE All-Share has done in terms of its performance – that’s up 20% year to date.
For a review of the property sector and what to expect in 2022, which is just a couple of weeks away, I’m joined by Garreth Elston, the CIO of Reitway Global. Garreth, thanks so much for your time. Not too shabby in terms of the rebound that we have seen in the listed property index on the JSE, which essentially has recovered from its pandemic lows. What were the main factors in your view that drove the gains?
GARRETH ELSTON: Hi there. Good evening and thanks for having me on. Yes, there’s definitely been a good bounce this year but, if we go back to the start of last year, the sector still hasn’t got back to where it was. We’ve seen that some parts of the companies within sectors have made up ground, but it’s still been a bit of a long slog.
It definitely has been, I think, the opening [of the economy], the return to normalcy that we start to see. Obviously fewer lockdowns this year have helped a great deal. We don’t have the massive lockdowns we had last year that really, really impacted the sector extremely negatively. So I think at least finally this year there’s a slightly better understanding that you can’t lockdown your way to a zero-Covid, and you certainly can’t lockdown your way to having a functioning economy.
FIFI PETERS: A slow slog it has been indeed for the sector, especially if you take it back five years. The listed property index is down 50%, so still quite a bit of a recovery to go. But give us a bit of a breakdown of the performance of the respective sectors this year in terms of the office, industrial, retail and residential portfolios. Which segment of the property sector outperformed?
GARRETH ELSTON: We’ve seen a very strong rebound, especially on the retail side, which has been good to see. It hasn’t really been too surprising because of the way they were very negatively hit. We’ve had much slower moves, for example, on the storage side; we continue to have in a global sense as well strong movements on the industrial and logistics side. We’ve been very strong with the drivers there.
But with most of the South Africa companies you have to remember that the bulk of our constituents are diversified. They consist of both retail and office. Something like a Growthpoint has healthcare, it has logistics, it has giant malls, [and] smaller malls. So the bulk of our sector really is diversified and there are not a lot of very specialised players within it. So often the problem you have is if you want pure-play exposure. We certainly have more companies now than we used to have, but it’s still very difficult to get pure-play exposure as opposed to what you can in an international market, for example.
FIFI PETERS: They are diversified in terms of segments and also in terms of geographies, which leads me to my next question about the performance of the companies that have their wings spread way beyond South Africa, or the rest of the continent into the rest of the world, and those that have focused purely at home or on the continent. Which have done better?
GARRETH ELSTON: Well, definitely over the last two years it would be those that would’ve had some offshore exposure. You can look at companies like Growthpoint Australia and Irongate – which is the old Investec Australia. Sirius, which is dual-listed here, which is primarily focused on Germany, has done very well. Lighthouse, which started to have some new deals going into France this year on the retail side, has started to recover pretty well.
But if you look at pure performers, we’ve had some very nice bounces, for example, on Dipula with them having a potential JV with Resilient; they really have recovered extremely well, north of a 100% performance in the year. That’s been pretty good to see. But it’s really driven by, I think – especially on the corporate-action side – a lot of movements, just because the prices literally were so beaten down at the start of the year. So you see nice recoveries there, nice recoveries coming for companies like Rebosis that have been beaten down and are now starting to see a way forward, which has been lacking for them for many years up until I think the middle of this year. That definitely has helped.
FIFI PETERS: You were talking about the recovery that has been seen in the retail segment of the property sector – the shopping malls, essentially. But what we also saw were many of these companies taking the position to keep their tenants, even if it meant that they kept them at lower increases in rent than would’ve been the case had it not been for Covid. It cost them to keep their tenants, but it would’ve cost them more to find new tenants.
I’m just trying to understand: for the property sector what are some of the lingering effects that still remain as a result of the pandemic?
GARRETH ELSTON: Especially on the office side it’s going to be a very long process for those to emerge from the impacts of the pandemic. Not only have we seen potential ongoing work-from-home – a process that’ll probably carry on going through – you’ve seen a lot of businesses go out of business during the pandemic. They obviously don’t need that space going forward. There is a lot of office space that’s still available.
If you drive around Sandton, it’s very difficult to make it 200 metres without a ‘To Let’ sign.
So office is definitely the sector – in a global sense as well – that is going to be the most opaque, the most unclear and the most under pressure probably for the next two years, as we start to hopefully eventually emerge from a Covid reality. But there are so many unknowns still within office, and especially locally it’s going to probably be one of the worst sectors that you would want to have exposure to at the moment.
FIFI PETERS: Especially with Omicron. I see quite a number of global companies, even local companies, which had plans to return back to the office, dialling back on those plans and saying, ‘Stay working from home’.
Nonetheless, Garreth, as we wrap up the conversation, what would your top three picks in the sector be, and why?
GARRETH ELSTON: Oh, you know, it’s always difficult to choose going into the next year…
but I would still probably say that you would be best suited having locally-listed companies with offshore exposure.
If we still had to pick at the moment we would probably play re-opening and *** plays within Eastern Europe. So companies like Nepi, Mas – we still think Sirius will continue to do well. Irongate is actually looking pretty [good] and *** for example, which reported an update today, is continuing to do very well.
So we still think pure-play South Africa’s going to be a tough place to be for next year. Even though prices have improved, the underlying conditions on the ground will remain tough.
FIFI PETERS: Which would not be the stocks that would be featuring in your portfolio, and why?
GARRETH ELSTON:Anyone with a large exposure to office, a large exposure to the larger retail sector still, for example. If you’re looking at more convenience retail that’s still going to remain, office within large retail, that’ll still remain under pressure as we work our way through all the Covid impacts, which are probably still going to be with us for the bulk of next year. That’s really not where we would like to have too much exposure at all.
FIFI PETERS: One of the Covid impacts we’ve also seen is property companies taking the decision to hold on to their distributions or their dividends, just to weather the storm a little better. Some of them have started to pay dividends and distributions again, but I think there’s one or two or three that haven’t. To what degree do you think that that could also be a bit of a risk and a bit of a challenge for the property sector in 2022?
GARRETH ELSTON: Look, I think we have seen a decent recovery. Companies do have two years – if they do pass the solvency and liquidity requirements – to pay distributions. So they do get a pass and it does make sense if you look at it last year. With the stress and the uncertainty that they had it did really make sense for them to hold on to those distributions, just as a matter of financial prudence.
But obviously for any investors that are looking for yield and reliant on it, it’s not great. But I think we’ve started to see movements a lot more positively on that.
So we’ve seen within the bulk of the companies that were under pressure and have passed the solvency and liquidity requirements, they have moved back into paying.
So we do think those pressures should definitely ease next year, and we won’t really have too many of the same situations we had prior to that, where companies were passing solvency and liquidity, and were still holding on to distribution. So definitely this year has been a return to a bit more of a normal situation, thankfully.
FIFI PETERS: All right, Garreth, thanks so much for that review. We’ll will leave it there. Garreth Elston is the CIO of Reitway Global.