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The highs and lows of listed property

And the expectations for 2019.

Listed property’s appeal as an asset class has taken a hit this year with the sector set for its worst annual performance since the South African Listed Property Index (Sapy) was launched in 2002.

The FTSE/JSE Sapy is currently down almost 24% in terms of total returns for 2018, compared to double-digit growth of 17.2% in 2017 and 10.2% in 2016. Sapy includes the top 20 most liquid real estate companies by full market capitalisation with a primary listing on the JSE.

The share price rout within the Resilient stable of companies this year has been blamed for the listed property sector’s volatility, but distribution growth for the sector has also been lacklustre on the back of poor economic conditions locally.

With most property counters lowering distribution expectations for next year, industry analysts and executives are anticipating another tough year ahead. Inflation-beating distribution for the SA real estate investment trust (Reit) sector on the whole for 2019 is looking less likely, with general expectations of around 5% distribution growth.

Income returns have still come in

Speaking at Moneyweb’s Retire Well event in Johannesburg last week, Keillen Ndlovu, head of listed property at Stanlib, said: “Property used to be the top performing asset class, but 2018 has been a very volatile year for the sector. While everyone is focusing on the capital loss this year, income returns for listed property have still come in at plus 5% in a tough economy.

“Listed property is still an amazing asset class in the long-term and this needs to be reinforced in the context of the current market. For example, if you invested in listed property in 2005, the capital return today stands at around 400%. Listed property also offers better liquidity than investing directly in physical property assets.”

Interviewed by Moneyweb later, Ndlovu added: “We say that investors should take a five-year view when investing in listed property. The primary focus should be income, and capital growth comes over time. The markets go through cycles and 2018 has been a bad cycle for property after years of perennial outperformance.”

According to Ndlovu, year to date up to Friday (November 23), the total returns for listed property as per the Sapy were at -23.8%. The total capital loss stood at -28.8%, but about 5% in distributions have been paid out. Equities are down -12.3%, while returns on bonds and cash come in at 6.9% and 6.5% respectively.

Questioned about the industry’s woes, Izak Petersen, chairman of the SA Reit Association, said he believes listed property is being “oversold” at the moment.

Sector ‘is in good hands’

“Property is cyclical and the sector will bounce back at some stage – 2020 could be the year … This year there has been an unprecedented sell-off in the sector. But fundamentally the sector is in good hands. There is a ‘disconnect’ in relation to share prices and the sector’s performance from a distribution perspective.”

Petersen added that with the Resilient group of companies making up 40% of the sector at the beginning of the year, issues within the group were having an impact on the entire listed property sector. The Resilient stable, which includes Resilient, Fortress, Nepi Rockcastle and Greenbay, is facing damning allegations of share-price manipulation, which has reportedly cost investors more than R120 billion.

“Clearly this is a cloud hanging over the listed property sector, but an investigation by the regulatory authorities is underway,” he said. “We hope this is cleared up soon.”

And while listed property has had a volatile year, equities as an asset class have also come under pressure, declining by over 10%. “Property is a long-term game,” says Petersen. “While things may be tough, there are still opportunities. Looking at listed property share prices currently, and the tough market, consolidation in the sector may also be coming.”

While Petersen was hesitant to comment on the industry’s expectations for growth next year, Ndlovu told Moneyweb that Stanlib believes a forward yield of 10% for the sector is achievable. “We are forecasting only income returns of about 10% in the next year and virtually no capital growth,” he said. “We are in a challenging and tough environment.”

On distributions per share (dps), Ndlovu confirmed forecasts of about 5% for next year. He said local portfolios would only deliver 2% to 3% growth, while offshore portfolios would come in at about 7% to 9%, boosting overall returns.

Increased offshore exposure

South African Reits have increased offshore exposure significantly in recent years, which has helped property counters diversify and offset poor local market conditions. According to Ndlovu, 42% of the SA listed property sector’s exposure is now offshore, largely focused on Australia and Europe.

“The trend still favours offshore, but we believe we may have seen most of it. The risks for investing offshore are currency volatility as well as concentration risk around Central and Eastern Europe. These markets are doing well, but our sector is overly exposed to the region,” he explains.

There is downside risk to the forecast of 5% growth in distributions if SA’s economic growth does not improve. “Next year could be challenging if the economy does not pick up and 2020 could be a turnaround year, assuming a good election outcome and better growth,” he added.

Many property counters are trading at a discount to net asset values and there is speculation that the sector could face a period of consolidation. “Given the divergence in valuations and yields, we are likely to see some consolidation through takeovers or mergers,” says Ndlovu. “However, the current volatile environment makes it difficult to price deals.”

Defying the odds

Companies that seem to be defying the odds in the current market include self-storage Reit Stor-Age, industrial and logistics focused Equites Property Fund, and Fairvest, which invests in rural and township retail. Stor-Age reported a 9.1% increase in dividends in its latest results released last week, while Equites and Fairvest grew theirs by 11.7% and 9.9% respectively.

The sector’s two largest primary SA-based Reits, Growthpoint and Redefine, reported distribution growth of 6.5% and 5.5% respectively for the 2018 financial year. Redefine has forecast growth in distributions of between 4% and 5% next year, while Growthpoint is eyeing just 4.5%.

Results to look out for this week include Arrowhead Properties and Vukile Property Fund, which come out on Wednesday and Thursday. Arrowhead has a 16.4% stake in the ‘B’ share of Rebosis Property Fund, which posted a 27.7% decline in full-year distribution earlier this month. In a SENS update on November 13, following the release of Rebosis’s results, Arrowhead warned that it now expects dividend growth for its full year ending September 30 to be between -15.25% and -15.75%.

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“Many property counters are trading at a discount to net asset value”

Maybe the NAVs are somewhat optimistic then?

Surely the REIT rule of having to distribute 75% of taxable earnings limits reinvestment and forces the use of debt or equity? Since interest payments are not tax deductible within the REIT, the distributions to shareholders will be sensitive to increases in interest rates. Probably not a good place to be if we are in an environment of increasing interest rates and cannot increase rentals.

In South Africa we have high inflation of the fixed cost component (rates and taxes, water, electricity, security) which is going to eat into the rental returns.

You could use properties in your portfolio to fund your acquisitions without the need for debt or equity.

Please elaborate how one would do this?

The highs and lows of listed property are more a tale of delayed truth after you never saw the effects of the 2008 crisis in valuations.

You cannot put off the truth forever.

Property can be a very attractive long term investment but one needs to factor in all associated costs, the impact through property being an illiquid asset and the significant influence on value through physical location. Naturally property related returns can be secured through other vehicles such as Funds, equities etc. – with improved liquidity outcomes. I repeat my regular mantra however – sensible investing is all about true international & actively managed diversification. Property can well have a place in a investment portfolio – but again should not be all consuming…

Could the reason we didn’t see a massive correction in 2008 be that local rentals were not affected that much by the financial crisis? The great recession came at a time when SA was getting ready for 2010 world cup and we had more runway ahead of us than the rest of the world at that point, so valuation were less affected. Now we have depressed GDP with little prospect of turnaround. If growth is depressed it begins to translates into property valuations as companies systematically begin to reduce the space they require to meet their market demand, putting rentals (in certain areas and sectors)under pressure. Add to that South Africa’s unfriendly attitude towards FDI with new policies like EWC and legacy problems like Zwane’s disastrous mining charter, and I think there are enough negatives in the current market to depress valuations without having to look too far back. That said, QE was the worst thing they could have done…..The only people who benefited from QE were the banks and their related parties. They should have instead allowed the banks to fail and they should have used the money to assist the people who lost their houses because of a crisis which was created by the very people they ended up giving more money to…..

For some of us interested in SA listed properties, this is valuable… Thanks Moneyweb

I wouldn’t go anywhere near it right now. Or at any time in the foreseeable future.

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