EXTRACT: Your guide to property investments
11:24 21/08/2018 Glenda Williams
Property, whether physical or listed, has been derailed by a soggy economy, subdued consumer and investor sentiment, issues within the listed property sector and land expropriation uncertainty.
House price growth has slowed. Sales are taking longer and achieving lower prices. On the listed property front, the SAPY Index, which tracks the Top 20 most liquid JSE primary listed property companies, has tumbled.
It might not sound like good news, but it could mean less inflated prices for both potential residential buyers and listed property investors.
Listed property: Derailed or back on track?
Listed property is a regular top-performing asset class.
But the SAPY, dented by a weak economy as well as controversy around the accounting policies and crossholdings of the Resilient stable (Resilient, Fortress, Greenbay and Nepi Rockcastle), has tumbled.
It has posted a year-to-date return of -22% (its 2017 overall performance was 17%), against that of -5% for general equities.
The sector’s pullback is heavily influenced by the drop in the four big counters, whose contribution amounted to around 40% of the index.
The counters lost between 40% to 60% of their value.
Strip the Resilient stable out and it’s a different story. “It is not like everything is down 22%,” clarifies Paul Duncan, investment analyst at Catalyst Fund Managers.
“Once you strip those out, the sector is probably down about 4% or 5%.”
The rand’s strengthening earlier in the year also negatively impacted offshore exposure on the JSE, Keillen Ndlovu, Stanlib head of listed property funds, tells finweek.
“In addition, the weak economic environment was exacerbated by increased supply in the retail space (as well as store closures by international retailers and Edcon’s intentions) and office space.”
There is other noise within the sector.
“There is uncertainty around the quality of earnings which, on average, has deteriorated from five years ago, so there is an expectation that the quality of earnings will be weaker on a like-for-like basis,” says Duncan.
Real estate investment trusts (Reits) in particular can expect heightened scrutiny on governance and quality of earnings.
Duncan reckons the sector had run ahead of itself and that more realistic levels were inevitable.
“A resetting of the base was required. The old levels were maybe pushed too high.
Once the earnings and quality of the earnings are stabilised, I think we’ll see an improvement off this new base,” Duncan tells finweek.
Now there is more value reflected in the underlying share prices, he says.
“Pricing now is attractive, and on a long-term investment case it is reflective of some of the risks that previously weren’t reflected. Investors are being more realistically compensated on a risk-adjusted basis.”
Capital allocation and the pursuit of growth
Given the weak domestic macro environment and an oversupply of space, particularly in the office sector, tenant retention is becoming all the more challenging. Office vacancy rates in the Prime & A-grade segments increased by 60 basis points and 20 basis points respectively in the second quarter of 2018, according to the South African Property Owners Association.
Overall office vacancy rates though improved to 11.1% (11.8% Q2 2017), in part a result of residential conversions in the C-grade segment.
Unsurprisingly, listed property companies are taking a more measured approach to the acquisition of these assets locally.
It’s a somewhat heartier story, though, for industrial property, both locally and abroad.
“The industrial sector has been the top performer, or the most resilient – more so abroad,” says Ndlovu.
“The biggest driver has been the growth in e-commerce or online shopping. The most attractive segment of the industrial market is warehousing and logistics.”
Confirming the industrial sector’s potential as a growth driver comes via specialist logistics REIT Equites Property Fund, which posted a compound annual growth rate (CAGR) figure over a three-year period of 26.1% against the mostly diversified SA Reit community average of 4.9%.
While the industrial portfolios of listed companies are on average somewhat smaller than retail or office, many entities are focused on increasing their share of the industrial pie.
One is Redefine Properties, the country’s second-largest Reit, which aims to increase its market share in prime industrial nodes through acquisition and development.
Industrial assets currently account for 19% of the portfolio, and R12.7bn of total asset value.
Two primary drivers of potential growth in the industrial sector are capital investments into automotive and mining-related industries, says Johann Nell, Redefine Properties’ national asset manager: industrial.
And, he adds, owner-occupier outweighs lease-driven demand.
To take advantage of this trend, Redefine has entered into joint ventures on some of its developments like that with Bidvest Properties at Brackengate?2 Business Park, located close to the Cape Town International Airport.
Comprising 32 917m2 gross leasable area (GLA) of completed and in-progress developments, Brackengate’s first-year yields are anticipated at between 8.25% and 10%.
The industrial investment thread continues abroad. Redefine recently acquired a 95% share for €185.8m (R2.9bn) in a portfolio of nine logistics properties in Poland.
The developed assets come with an initial income yield of 7.1%. It also has rights to a pipeline of 24 new warehousing and logistics assets.
“This move into the rapidly expanding Polish logistics sector is an exciting opportunity to expand our European brand by building a significant logistics platform,” says Redefine CEO Andrew König.
The diversified REIT already has significant, mostly retail exposure to Poland via its 36.2% interest in Polish-based EPP and 25% stake in Chariot Top Group.
Accelerate Property Fund, meanwhile, expanded its offshore reach by acquiring five industrial properties in Poland, adding to its exposure in Austria and Slovakia.
South Africa’s largest Reit, Growthpoint Properties, is also focused on industrial expansion offshore, citing logistics in Poland as an area of opportunity.
Invested in Romania, Poland and Australia, Growthpoint aims to grow both its international exposure (currently 24%) and offshore income (19%) to 30% over the next three years.
This is an extract of the cover story that originally appeared in the 16 August edition of finweek. To get the full story, buy and download the magazine here.