Listed property continues to underperform

Hopes for a stronger turnaround in SA’s listed property sector this year seem to have all but dissipated.

Following the sector’s annus horribilis in 2018, which saw it lose some 25% of its value, listed property continues to be the worst-performing asset class.

According to the latest Rode Report on the SA Property Market (Q3, 2019), the SA Property Index (Sapy) delivered a total return (income yield and capital return) of 1.3% for the first nine months of 2019. In comparison, equities or the All Share Index were up 7.1%, cash delivered 5.5% and bonds were the top performer with growth of 8.4%.

Read: Reits on the recovery path 

The report notes that the Sapy “recovered somewhat” in 2019, but points out that in the 12 months to the end of September “listed property remained the worst performer among the traditional asset classes” with the total returns of both the Sapy (-2.7%) and the All Property Index (-7.7%) in negative territory.

The Sapy comprises the JSE’s top 20 largest and most liquid primary-listed SA real estate investment trusts (Reits), while the new All Property Index (Alpi) incorporates dual-listed funds such as Intu and Nepi Rockcastle.

Kobus Lamprecht, head of research at Rode & Associates, comments in the report that following the sector’s woes last year, listed property was “helped by positive findings of the Resilient-stable investigations and Edcon’s survival” this year.

He notes that Resilient’s total return recovered significantly after falling by 55% last year, while the group was also cleared by the Financial Sector Conduct Authority of insider trading.

Lamprecht nevertheless warns that operating conditions in the listed property sector remain tough and the economy is struggling to grow. “Therefore, it is no surprise that the latest [property] company results continued to mostly disappoint. Companies generally reported weaker financial results and warned that results could get worse.”

Winners and losers

He adds: “Most companies struggled over the first nine months of 2019, notably New Frontier (-99%), Rebosis (-89.2%), Delta (-85.6%) and Intu (-60.8%). Companies that stood out with total returns of above 20% include Transcend (+37.1%), Investec Australia (+32.6%), Sirius (+27.6%), Resilient (+24%) and Nepi Rockcastle (+21.7%).”

Read: Resilient CEO sees ‘positive outcome’ from FSCA investigation

Lamprecht says the outlook for growth in distributions will continue to be marred by poorly performing property fundamentals. “It is clear from the distribution expectations provided by the companies that the near-term operating environment will remain challenging.”

Keillen Ndlovu, Stanlib’s head of listed property funds, agrees. He tells Moneyweb that property fundamentals such as operating income and rental growth continue to deteriorate, pointing to further weakness in the market over the next year or two.

According to Ndlovu’s research, like-for-like net operating income growth among SA’s top 10 listed property counters has halved from 5.4% growth in 2015 to 2.7% this year. Rental growth upon lease expiry has declined to -3.5%.

“We have seen more negative surprises and the outlook is worse than the market expected at the beginning of the year,” he says. “It’s a function of the poor economy, where we have seen office vacancies increase and retail sales slow, which has resulted in a decline in rental rates. At the same time, the property sector is seeing an increase in operating expenses.”

Outlook

Ndlovu’s outlook in terms of average distribution growth for local Reits is now at a meagre 0.5%. He says that if SA property counters did not have offshore exposure, the sector would see average distributions decline by 4% to 5%.

Read: Capital flight: SA property companies invest billions more offshore

Craig Smith, head of research and property at Anchor Stockbrokers, says the fact that listed property is currently the worst performing asset class is not surprising.

“There is a lag between economic growth and the real estate sector [in terms of performance],” he notes. “We have been in a weak cycle for a number of years now, hence this has had an impact on business activity in the sector in terms of leasing additional space and market rental growth.”

“While the sector’s 2019 performance has been weaker than expected, in the listed environment things can change quite quickly,” says Smith.

“We still have around two months til year-end. The weaker performance has been impacted by low business confidence, which has been much lower than one would have expected. Therefore, listed property sector results have generally been weaker than the market had anticipated at the start of the year.”

He says there is definite value in the sector.

“Property is still a good investment over the long term, provided of course that you are entering [buying] at a fair price. This is not to say that all stocks trading at discounts offer value. In some instances, the discounts may well reflect the economic reality given stretched property values, high gearing and lack of management focus.”

Listen to Lamprecht’s interview on SAfm Market Update with Moneyweb: