SA's listed property: Investors need to be more realistic about returns

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South African listed property CEOs say the dark cloud that hovered over the sector in the past few years is gone now. But the historic 30% to 40% returns are not coming back. Photo: iStock
South African listed property CEOs say the dark cloud that hovered over the sector in the past few years is gone now. But the historic 30% to 40% returns are not coming back. Photo: iStock
  • SA's listed property sector delivered annual returns of up to 40% 2010 and 2017.
  • But those golden years were followed by a spectacular fall in share prices, a steep rise in debt levels and then tanking of rental incomes in 2020.
  • The sector rebounded in 2021, but CEOs say investors are in for more "realistic" returns going forward.

South African listed property CEOs say conditions are improving in the sector. But the historic 30% to 40% annual returns are not coming back.

After the sector was decimated by the pandemic, almost all listed property companies have started declaring distributable income dividends again. Tenants' revenues have bounced back from record lows in 2020, and landlords still see demand for their space.

"There's a level of optimism that we are seeing. Every time somebody brings out a SENS [Stock Exchange News Service] announcement or results talking specifically about how the retail industry is performing… we all have little celebratory dances for each other when we see that turnovers are back to 2019 levels and foot count is coming back," said Liberty Two Degrees CEO Amelia Beattie.

Izak Petersen, CEO of Dipula Income Fund, said doomsday predictions about the retail apocalypse and nervousness around the possibility of further declines in property valuations are receding.

"Some of the things that we were going through as a sector, I think some of that is now behind us. I think there's a chance that the gap between the NAV [net asset values] and share price might close going forward," he said.

He said the industry is now preparing for "better days" and is even looking out for investment opportunities.

Entering the age of realism

The sector fared better than many initially predicted. However, despite this recovery, the listed property sector is no longer what it used to be. Even the CEOs who spoke at the SA REIT Conference on Thursday were managing investors' expectations.

The real estate investment trust (REIT) companies used to be the darling of the stock market in SA. Investors flocked to the sector, especially between 2010 and 2016, when companies paid out large distributions.

Valuation of landlords' stocks reached new highs as listed property companies regularly delivered annual returns of around 30% to 40%. Then, in 2018, the wheels came off. The sector fell out of favour with investors as debt levels of listed property firms started to rise significantly, and many companies revised their earnings outlook downward. This was followed by the pandemic, which wrecked vacancies and rental income from offices and large malls.

But 2021 became the year of redemption for the sector as the SA Listed Property Index delivered a 28% return.

But despite the rebound that the sector sees, industry leaders believe the 30% to 40% returns of the past are history.

Redefine Properties COO Leon Kok said the focus on short-term distributable earnings is unsustainable. It's time to treat property as a long-term asset.

"I think in the golden years, we were quite spoilt. Those returns were phenomenal. But I think we must be realistic. Property is an asset class. The real return is the growth in earnings and capital growth. We must be more realistic about what those returns can be. It's not the numbers that people are throwing around. More realistically, you are looking at low teens to upper teens," he said.

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