6294.37

2017/06/08 00:00:00

Political developments at the tail end of the quarter weighed on the SA market as a whole, with both listed property and bonds reversing the gains achieved up until mid-March. Listed property was able to eke out a 1.4% return for the quarter, lagging the All Bond Index's 2.5% and the All Share Index's 3.8%. The correlation between bonds and listed property was once again reinforced; the SA 10-year government bond yield was unchanged at 8.9% at end-March from a quarter earlier (though it touched a low of 8.4% during the quarter), as was the forward yield of the SA listed property sector at 7.8%. Index adjustments during the quarter, however, were responsible for changes in the historical SAPY yield, which increased to 6.3% from 5.9% three months earlier. This resulted in a narrower historical yield gap relative to bonds (264 basis points [bps] at end-March vs 298 bps at end-December). The fund's return of 1.3% during the quarter was slightly less than the 1.4% delivered by the benchmark; however, the fund gained momentum over periods between one and five years, while losing some momentum over the 10-year period. The slight underperformance during the quarter was due to value detraction from the fund's relative exposure to Capital & Counties, Intu, Hyprop, Growthpoint and Resilient. These were enough to offset the value-add from the fund's relative positioning in Attacq, Equites, Hammerson, Nepi and Stor-Age. During the period, the fund increased exposure to Hammerson, Fortress B, Resilient, Stor-Age and Attacq, while reducing exposure to a handful of names, including Redefine, Nepi, SA Corporate, Hyprop and Growthpoint amongst others.
Typical of the listed property sector, the quarter saw just under R7.5 billion in primary capital raises. Investec Australia Property Fund's rights issue fell slightly short of target, with the company raising R1.4 billion compared to the intended R1.5 billion owing to only 96% of shareholders taking up rights, while Rebosis was able to raise R485 million in an accelerated bookbuild, taking advantage of the good run in its share price in recent months. Stor- Age successfully raised R400 million to part fund its acquisition of Storage RSA, while Spear REIT also came to the market with a R119 million private placement. In other activity, Nepi saw good appetite for its scrip - with its bookbuild raising R1 billion, twice the amount initially targeted, while Greenbay saw even larger appetite with a R2 billion accelerated bookbuild. MAS came to the market with a R1.75 billion capital raise, while Sirius Real Estate privately placed just over R200 million.
In terms of personnel changes within the sector during the quarter, Arrowhead announced the appointment of Mark Kaplan as its new CEO following the passing of former CEO, Gerald Leissner, at the end of 2016. Mark was also appointed CEO of Arrowhead subsidiary, Gemgrow, following the conclusion of the deal with Vukile and Synergy. Rebosis also made changes to its executive management, with former board chairperson Andile Mazwai appointed as the fund's COO, while Kameel Keshav resigned as CFO, replaced by former Texton financial director Marelise de Lange. In other activity, Texton announced its intention to internalise its management company for an amount of R180 million. The proposed internalisation will be subject to a number of conditions, including shareholder approval - of which the company has received indicative support from 40% of eligible voters. Texton also announced that financial director Brigitte de Bruyn has resigned from the company, and will vacate her position after 30 June 2017. Meanwhile, Capital & Regional CEO, Hugh Scott-Barrett is set to retire, with Lawrence Hutchings (previously at Blackstone Australia and Hammerson) to serve as his replacement. In acquisitions outside the country, Resilient and Greenbay announced the joint acquisition of two retail centres in Portugal, Resilient's first foray into direct property in Europe, which the company had hinted at in recent months. Meanwhile, Attacq exited its investments in Cyprus and Serbia, opting to have its exposure to the region via one vehicle, being MAS Real Estate in which Attacq is the anchor shareholder.
SAPOA released its office vacancy survey for the fourth quarter of 2016 during the quarter. The survey showed that office vacancies increased to 10.7% in December 2016 from 10.5% a quarter earlier. Of the four office grades, P-grade space was the only category to see an improvement in vacancies, while the other three categories saw weaker vacancy trends. Of the five metropolitan areas, Port Elizabeth and Pretoria registered improvements in vacancies during the quarter, while Johannesburg and Durban saw an increase in vacancies. Cape Town office vacancies were unchanged from the previous quarter. Asking rents were 8.3% higher over the last 12 months versus 8.0% in the previous quarter. In terms of office space under development, a high degree of concentration remains - with 10/53 nodes accounting for 89% of all developments. Almost half this space is in the Sandton node, with Gauteng as a whole being home to 94% of all the office space under development.
The first reporting season of the year took place during the quarter, with results announcements from companies representing just under 60% of the sector's market capitalisation. Including offshore counters, distribution growth averaged 9.3%, ranging from a low of -16% (in ZAR) for Mara Delta, going up to a high of 16.6% for Hyprop. Three domestic counters saw negative growth in distributions, with two of these (Tower and Texton) being due to once-offs in the base that will no longer be paid out going forward. The other counter - Emira - experienced an increase in vacancies in its office portfolio that was previously guided to. The stronger rand over the period weighed on the results, with distribution growth averaging slightly higher at 11.0% excluding offshore counters. Excluding Resilient and its sister companies, dividend per share growth for the local counters registered 7.7%, a touch lower than the 8.8% registered by the same group of companies six months ago.
Underlying metrics from the companies that reported results indicate that although fundamentals have not had a wheels-off deterioration, conditions remain challenging across the various sectors given the broader economic backdrop. Vacancies have generally held steady across the different companies (with the exception of Emira), but rental renewals remain under pressure. As has been the case for the past 18-24 months, negative reversions in the office sector continue to prevail as landlords compete for limited tenants given the lack of new demand, while a similar tale plays out (to some extent) in the industrial sector despite low vacancies. After holding up relatively better than the other sectors, retail is starting to show signs of strain, with weaker trading densities coming through from the major landlords, in turn putting downward pressure on renewals. In the residential space, landlords are starting to see tenant pushback on rental increases as affordability thresholds are reached, with inflation-type increases now expected compared to high single-digit figures in the recent past. Management teams have generally taken these headwinds in their stride, and save for Emira, no material decline in core earnings is expected. Of some comfort going forward is the likely peak in the rate-hiking cycle that has been reached, which should provide some reprieve to the sector going forward. The recent reporting period has shown that the listed property sector is not immune to the challenging economic backdrop the country is facing. However, while a number of underlying metrics indicate some strain, these have not been enough to derail the sector's distribution growth prospects, and we continue to expect at least real growth in distributions over the medium term. On the other hand, recent developments on the political front may likely prove more material to the sector's rating for the remainder of the year and potentially beyond. With the ruling party's elective conference still some months away, further bouts of volatility remain likely. However, given the initial yields the listed property counters trade on, as well as the expected real growth in distributions, we remain of the view that total property returns should exceed those of government bonds and cash over the medium term.