SA property: Priced for bankruptcy, but not out of options

Over the past three years, the local listed property sector has lost more than half its value. It has been hit by a barrage of factors that have turned it from a market darling into probably the most unloved part of the JSE.

The Sesfikile BCI Property fund ranks seventh among South African property funds over this period. Yet it is still down nearly 50%.

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The fundamentals in the sector are considered so poor that many fund managers are simply avoiding it. However, with prices being so low, others are starting to look at the valuations on offer with a little interest.

Sentiment
Redefine, for example, is trading on a forward 12-month distributable yield of 32.4%. Vukile’s forward distributable yield over the next year is 29.5%.

Speaking at the BCI Global Investment Conference, Citywire AA-rated Even Jankelowitz, co-manager of the Sesfikile BCI Property fund, said that he doesn’t see a reason for these kinds of companies to be trading at such levels.

‘Every asset has a price,’ said Jankelowitz. ‘We understand that things aren’t good on the ground. But, at current valuations, several of these companies are priced for bankruptcy.

‘There may be one or two casualties, and I’m not saying everyone is going to be squeaky-clean. But the bulk of them will survive.’

Bad to worse
He pointed out that Sesfikile has not held Rebosis for several years because the firm does not believe it is a going concern.

Yet the banks have kept the company alive.

‘So why would banks take down a Redefine where the company’s interest cover is still meeting covenants?’ said Jankelowitz. ‘I’m not saying things can’t get worse, but we’ve already been through Eskom, sovereign downgrades, and now Covid, and they are still able to meet their covenants.’

Prices have been so depressed, that some stocks in the South African listed property universe are now trading on price-to-NAV of about 20%.

‘You can argue that valuations will come in lower, but we are seeing several companies dispose of assets at close to book value,’ said Jankeloitz. ‘The likes of Redefine and Arrowhead have sold properties at reasonable prices.’

In his view, this suggests that sentiment has swung too far.

Upside

‘Foreigners have ignored South Africa, and generalists are still up in arms about the quality of earnings, which we think has been repaired,’ said Jankelowitz. ‘The demand has fallen away, and that’s created quite a decent value opportunity.

‘We do our own trading, and when I look at screens I can see volumes,’ he added. ‘There is no love in the sector. That means that as soon as there is some marginal demand, you see it. When we got inflows, we touched one or two stocks and it impacted the price.

‘So, if foreigners come back, or generalists run out of opportunities in other stocks, when that little bit of demand comes through, there has to be upside.’

Jankelowitz reiterated that this doesn’t mean that he thinks there will be a strong recovery in fundamentals. However, he doesn’t believe property companies are out of options.

‘We are seeing that companies will reduce their payout ratios to 75% of distributable earnings,’ he said. ‘They will utilise that to reduce their loan to value. In certain cases, although the JSE and Sars aren’t too keen on it, companies will retain the full amount. They might lose their Reit status because of that, but they would still be a going concern, and they are priced that they are not at the moment.’

Reit status

This would be a way to manage strained balance sheets, and potentially the market could view it favourably.

‘Let’s assume that they can’t dispose of any more assets, and in order not to breach covenant they withhold their entire distribution,’ said Jankelowitz. ‘That potentially creates a lot of fire-power.

‘If it’s done in order to make sure that they are still a going concern, I would think of it as positive. They would lose the Reit benefit, which gives tax breaks on the disposal of assets, but if they can’t sell assets anyway, what difference does it make?’

Some property stocks are on such low valuations, that if the market could be given the comfort, with a high degree of certainty, that they are growing concerns, that would be viewed positively, regardless of them retaining their Reit status.

‘I’m generally a pessimist,’ said Jankelowitz, ‘but on these valuations, I can’t lie to you. Yes, there is a lot of bad news. But I think the market is pricing for that, and more.’

Patrick Cairns is South Africa Editor at Citywire, which provides insight and information for professional investors globally.

This article was first published on Citywire South Africa here, and republished with permission.