Property investors who expect to be rewarded with inflation-beating dividend growth in 2018 are in for a surprise, judging from the latest dividend forecasts by SA’s real estate companies.
Real estate investment trusts (Reits) have earned a reputation for being progressive dividend payers even during tough and uncertain times.
It seems that the days of investors being rewarded with dividend growth – a key metric that investors typically use to judge the investment case of Reits – of between 8% and 15% are long gone.
Many investors expected Reits to report flat and even negative dividend growth for their 2017 financial year while 2018 would be the year of recovery in dividends. However, a recovery is not on the horizon.
The latest Reit to shock investors is sector heavyweight Redefine Properties, which told investors on Monday that dividends would grow by 5% to 6% in 2018. This would be the first time in a long time that Redefine’s dividends might be slow or even be negative after inflation is factored in.
Speaking at Redefine’s results presentation on Monday in which the company lifted its full-year dividends by 7% to 92c per share, CEO Andrew König said SA’s tough economy is weighing on office and retail properties.
It’s becoming increasingly difficult for landlords to attract competitive rentals given weak demands from tenants, increasing rental space and dampened business confidence said König.
Redefine is not the only company feeling the pressure.
Growthpoint Properties expects its dividend growth to be about 6% in 2018 – similar levels reported for its 2017 financial year. Delta Property Fund expects zero growth in dividends in 2018, after growing dividends between 8% and 15% during 2014 to 2016.
Liberty Two Degrees and Hyprop Investments expect lower dividends due to the recent closure of Stuttafords stores at some of their shopping malls. Both counters had a large exposure to Stuttafords relative to their peers and have recorded vacancies from the retailer’s demise.
Ian Anderson, the chief investment officer at Bridge Fund Managers, said the downgrade of dividend forecasts is not surprising as he expected dividend growth of 4% to 5% in 2018 for SA-focused property companies.
“With significant political and economic uncertainty in SA, the situation is unlikely to reverse quickly and investors should expect an extended period of lower distribution growth from the SA component of the JSE’s listed property sector,” said Anderson.
A change in the accounting policies of several property companies to exclude once-off profits in dividend payouts such as development fees or capital reserves (which could artificially boost dividend payments), is also the reason behind lower dividend payouts.
Jittery investors have given the share prices of Redefine, Growthpoint, Hyprop, Liberty Two Degrees and Delta a dressing down, with their share prices down between 5% to 22% so far this year.
Anderson said the expectation of lower dividends has been priced in by investors as seen in current property stock valuations. A large percentage of property stocks are trading large discounts to their net asset values and on forward income yields that exceed the 9% yield on ten-year government bonds, he added
Lawrence Koikoi, the portfolio manager at Stanlib, said some stocks could be good buying opportunities. “That is if you believe the SA economic fundamentals could improve in the long run provided you buy into the strong management team with good quality assets,” he said.
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