Metope Property Prescient comment - Sep 19
Political uncertainty remained elevated during September in a number of major global economies, including US impeachment proceedings against President Trump, ongoing Hong Kong protests, a UK ruling that Prime Minister Boris Johnson acted illegally by suspending parliament amid Brexit woes, and a drone attack on a Saudi oil facility which sent the oil price temporarily higher. Additionally, the nega-tive economic effects of Trump’s trade war with China are beginning to show in slower growth num-bers out of both countries, with Trump also announcing tariffs on European goods.
Amid the threat of slowing growth, the US Federal Reserve cut its benchmark rate by 25bps as ex-pected, while the ECB committed to extending ultra-accommodative interest rates and bond-buying for as long as necessary. With the upcoming Medium Term Budget speech and the risks to the currency surrounding Moody’s rating decision, the SARB kept rates on hold at its September meeting, despite lowering both the inflation and growth outlook.
During September, several listed property companies reported results. Growthpoint, South Africa’s largest REIT, presented their final results to 30 June 2019. The company delivered a solid dividend growth of 4.6%, while guiding for tougher times ahead and a slowdown of growth, if indeed any, for the 2020 financial year. Growthpoint’s offshore investments, including ASX-listed Growthpoint Austral-ia and LSE AIM-listed Globalworth Investment Holdings, contributed positively to distributable income growth, while the local property portfolio detracted somewhat. Vacancies have ticked up marginally and renewal success comes at the expense of rental growth in the local market, where tenants are increas-ingly under pressure. Growthpoint announced its intention to potential acquire a controlling stake in Capital and Regional, a JSE- and LSE-listed UK REIT focussed on community shopping centres.
Two of the JSE’s retail focused funds, Hyprop and Fairvest, released their annual results to June 2019. Fairvest, with a 100% South African portfolio diversified across 42 properties in lower LSM and rural areas, achieved DPS growth of 8.1%, while Hyprop, largely as a result of their investment into AttAfri-ca’s portfolio of African retail centres, reduced their distribution per share by 1.5%, and is guiding to a further 10-13% reduction in DPS for FY2020. Hyprop’s South African portfolio performed admirably (6.5% growth in distributable income) despite headwinds to retail performance from Edcon who is their largest tenant, while their investment into South Eastern Europe contributed positively with 13.5% growth in distributable income. Hyprop, together with partners Attacq, is looking to dispose of all the assets in the African joint venture by June 2020. Fairvest is guiding to a 4-6% growth in distributable income for 2020.
Mas Real Estate delivered on their guidance of a 15% growth in dividends for the full year to June 2019, and committed to delivering a cumulative 30% growth in dividends over the next three years to 2022. Post results, MAS announced a potential transaction to acquire the Prime Kapital investment platform, as well as the appointment of Martin Slabbert and Victor Semionov as CEO and COO respectively. Shareholders are required to vote on the transaction once the circular is released.
Poland focused EPP’s interim results delivered flat growth in dividends, and maintained guidance for full year of flat or better. The loan to value ratio, while high at 49.8%, has reduced from 51.9% at end 2018, despite the acquisition of tranche II of the M1 portfolio. EPP has a medium-term target of 45% LTV, which reduction will come at the expense of dividend growth in the short term. EPP”s flagship shopping centre development in Warsaw, Galeria M³ociny, opened in May 2019.
We expect to see further moderation in dividend growth in the next 12 months, as local REIT’s struggle with weak property fundamentals and tenants remain under pressure. Thereafter we expect growth to recover to inflation-linked levels in 2020/2021. The sector is currently trading on a forward yield of 9.4%, with SA REIT’s trading on an attractive forward yield of 10.4%. For long term investors, this represents and attractive entry into the sector.
The Metope Property Prescient Fund aims to provide investors with a combination of high income and long term capital appreciation. The investable universe of the portfolio includes property securities, property collective investment schemes, property loan stock, Real Estate equity, money market instruments, bonds, fixed deposits and other interest bearing securities, derivatives and assets in liquid form. The portfolio will invest at least 80% of the market value of the portfolio in securities listed in the FTSE / JSE Real Estate industry group or similar sector of an international stock exchange and may include other high yielding securities from time to time. Up to 10% of a portfolio may be invested in securities outside the defined sectors in companies that conduct similar business activities as those in the defined sectors. The portfolio may from time to time invest in listed and unlisted financial instruments, in accordance with the provisions of the Act, and the Regulations thereto, as amended from time to time, in order to achieve the portfolio's investment objective. The manager may also include unlisted forward currency swaps, interest rate and exchange rate swap transactions. The portfolio may also invest in participatory interests or any other form of participation in portfolios of collective investment schemes or other similar collective investment schemes as the Act may allow from time to time, and which are consistent with the portfolio's investment policy. Where the aforementioned schemes are operated in territories other than South Africa, participatory interests or any other form of participation in portfolios of these schemes will be included in the portfolio only where the regulatory environment is, to the satisfaction of the manager and the trustee, of sufficient standard to provide investor protection at least equal to that in South Africa. The Trustee shall ensure that the investment policy set out in the Supplemental Deed is carried out.