Property Flash


The SA listed property sector has recouped almost all of its losses for the 2022 year and is down about 5% so far on a total return basis, i.e., income and capital. At some point this past September, it was down almost 18% year-to-date. The strong recovery, driven by several factors, including improved global markets sentiment, happened in October, and spilled into November.

However, in the past 12 months, listed property has returned less than 7%. The previous five years have been more challenging, from the well-documented 2018 collapse to the Covid-19 pandemic and the negative effects of the July 2021 unrest. Given these significant events, including a weak economy, if one had invested in the sector in the past five years, they’d have made a negative return of about 7% (annualised). The effects were so significant that even over ten years, only 2% to 3% (annualised) would have been achieved. That’s below inflation, from an asset class which is traditionally known as an inflation hedge.

The sector used to be homogenous. It’s no longer the case. For example, year-to-date, the gap between the best and worst performing stock is about 90%. The price to net asset value (NAV) differs by almost 70% between the cheapest and most expensive stocks. And the pool is diverse when it comes to liquidity and size. Stock picking is increasingly becoming more crucial when trying to earn a return.

An alternative is to compare the performance between various property funds or unit trusts in the real estate sector. Over the past year, the gap between the best and worst performing fund managers is about 10%. It’s the same story over three years (annualised). That’s a lot, but the gap could be even higher given the massive divergence in the performance of subsectors as defined by property type.

The industrial and logistics sector continues to do well, as does the storage sector. The residential sector’s performance is mixed. The retail sector is improving after the pandemic. Township and rural, as well as commuter retail continue to improve. Social grants are helping, boosted by the extension of Covid relief grants. The office sector remains challenging, with vacancies remaining high and unlikely to fall soon. There are potential conversions to residential or other uses. But only for some office buildings, however. For conversions to work and be commercially viable, property owners may need to mark office buildings down by 30% to 50%. 

Listed property landlords are facing challenges with constantly rising operating costs, including rates, taxes, and security, as crime levels continue to increase. Loadshedding is costing the sector in many ways – disruption in trading hours and lost trade, as well as the cost of diesel to power generators, their maintenance or replacement. The year 2022 could be a new base for higher electricity-related costs as we have had the most extended hours of load-shedding in this period than in any other year in SA’s history. 

The end of Covid-19 restrictions is opening the economy and international travel, including business travel, which is good for conferences, hotel occupancy, restaurant trade, and related industries. However, hybrid working is here to stay, with some people attending conferences virtually, to save time, travel, and accommodation costs. Opportunities for niche sectors like healthcare and student accommodation are opening, with some listed property companies and real estate investment trust (Reit)s starting to focus more on them. 

Although the interest rate hiking cycle could peak soon, rising interest rates have been negative for the sector. Most of the debt is fixed. The risk lies in the 20% portion tied to floating rates, and to the 20% to 30% of the debt which is coming up for renewal over the next year. Loan-to-value (LTV) ratios have come down from over 40% over the past two years to manageable levels of about 35%. But it’s also crucial to consider see-through LTVs, as some listed property stocks invest in other stocks or entities with debt.

The sector is trading at a discount to NAV of about 25%. It’s cheaper to buy listed property than it is to buy direct property. The huge discount also creates opportunities for delisting. Significant mergers and acquisitions have yet to happen, but opportunities still exist, given the wide divergence in valuations. Raising equity at these levels is not logical as it destroys value. It would be better for listed funds to, for example, sell non-core assets at a 10% to 20% discount, to private buyers if they are desperate for capital. Going to the banks to get more debt is not ideal in this environment.

With barely any capital available, the sector has moved away from the traditional 100% pay-out ratio policy. As much as 25% of the income is retained for either reducing debt or interest expense or for capital expenditure and operational requirements. Some stocks are even considering abandoning the Reit structure, to have more flexibility on the profits they generate.

Shortage of property skills to effectively manage assets, succession planning, and not enough diversification by age, gender, and race, at senior management level remain an issue. There’s room for improvement in several property companies.

The recent changes in Regulation 28, where retirement funds can invest up to 45% offshore (from 30%), could lead to a dilution in interest for local property as local fund managers focus more on offshore investments, driven by the negative sentiment on South Africa. Offshore investors in SA local property are mainly index trackers exposed to stocks that are included in global indices. The local listed property sector market capitalisation has shrunk, and so has its weighting in various indices or benchmarks. Most local balanced fund managers have very low exposure, of about 3%.

Looking ahead, major challenges across all local markets include low economic growth, the possibility of a global recession, the uncertain local political environment, and the risk of South Africa being grey listed. Grey listing means that a country has been recognised as having compliance issues but has committed to address strategic inadequacies to counter money laundering and terrorist financing within a given timeframe.

The interest rate hiking cycle will peak soon. Corporate governance has improved, and so has the quality of disclosure. The listed property sector has delivered barely any returns for the past ten years. The valuations and performance already reflect the pain that the sector has been through. In addition, there’s a massive divergence in performance and valuations. This creates lots of opportunities for shrewd and patient investors.

Keillen Ndlovu is the former Head of Listed Property at STANLIB and writes in his personal capacity.

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