Property: Poised for an upturn or still a hard sell?

Nesi Chetty, Senior fund manager: listed property at Stanlib. (Picture: Supplied)
Nesi Chetty, Senior fund manager: listed property at Stanlib. (Picture: Supplied)

Over the last 18 months, the property market, once buoyant and the darling of both the stock market and home buyers, has been weighed down.

Policy ambiguity around land reform, as well as concerns around electricity supply continue to plague the country.

Consumer and investor sentiment have been downbeat and have done the sector no favour.

But signs of an upturn in the sector are visible. 


Some years back, CEOs in the listed property sector were operating in a positive environment.

“All they had to do was manage portfolios, acquire assets and they were growing,” says Nesi Chetty, senior fund manager: listed property at Stanlib.

Now it’s the opposite. The environment is tough; there’s pushback on pricing and deals have mostly dried up; vacancies are rising, and lease renewals are challenging.

“Nowadays it’s more a case of managing the properties and ensuring spending goes on refurbishments,” Chetty tells finweek.

Listed property’s underperformance in the last 18 months was triggered by a collapse in Resilient, Fortress and NEPI following cross-holding and accounting controversies.

It wasn’t helped by weak domestic fundamentals and global growth concerns. Last year the sector experienced a 31% de-rating – the worst in history – as earnings outlooks were revised lower.

Most SA real estate investment trusts (Reits) are now trading at a discount to net asset value (NAV). And JSE-listed SA property funds now able to post inflation-beating growth are in short supply. Dividend growth in the SA market has slowed to between 3% and 4% from 8.4% in 2018 and 11% in 2017, says Chetty.

But some have bucked the trend. Among SA’s Reits, specialist logistics fund Equites Property Fund; Waterfall-precinct-focused Attacq; lower LSM, retail-focused Fairvest Property Holdings; and Vukile Property Fund, with its near-equal retail focus in SA and Spain, all posted high single-digit growth or low double-digit growth.

Despite their sizeable diversified portfolios, the country’s two largest Reits, Growthpoint Properties and Redefine Properties, posted lacklustre growth of 4.5% and 4% for their half years to 31 December 2018 and 28 February 2019 respectively.

Office vacancies have been sitting at around 11% for some time, according to Bandile Zondo, executive head of financial sector equity research, Standard Bank Group Securities.

Traditionally viewed as a defensive asset class, the retail sector has also come under pressure. According to the South African Property Owners Association (Sapoa), retail vacancies are currently at 4.2%, above a long-term average of 2.9%.

In South Africa, retail comprises the biggest chunk of exposure for listed property. At 59%, it dwarfs office at 24%, industrial at 14% and other assets [hospitality, residential, etc] at 3%, reports Sapoa.

“That speaks to the fact that about 60% of our GDP is driven by consumers. However, trading density growth [sales/m2] has come off quite sharply over the last few years, currently averaging about 2.5%,” Zondo said at Sapoa’s annual convention and property exhibition in June.

While trading density levels have seen recovery in the larger retail formats, Sapoa data indicates that apparel and department stores like Edcon, Woolworths and Pepkor have all underperformed.

“The weak economy is exposing weak business models and weeding out weak retail operators like Edcon,” Chetty tells finweek.

Although instrumental in Edcon’s recapitalisation and restructuring process through rental reductions and equity participation, SA Reits are reducing their exposure to the large retailer, expected to take back around 40% of what Edcon occupies. Edcon is managed for now, but risk remains, says Zondo.

Navigating the challenging local environment

Currently, aggressive dealmaking is taking a back seat, says Chetty. Rather, the focus appears to be on improvement of local assets to ensure relevancy and uplift property value.

A general theme at results presentations this year has been the repositioning and right-sizing of tenants and rental incentives in order to remedy vacancy pressure. At the same time there is a search for innovative models with potential to provide new revenue streams.

In tackling office vacancies, SA’s Reits are capitalising on the co-working trend.

Both Growthpoint and Redefine have added the co-working model to their portfolios, while Emira Property Fund recently opened its account with global co-working operator WeWork, which is expanding its SA presence to Cape Town.

WeWork says they’ve seen great interest from companies of all sizes, including Naspers*, who will be moving into their first location in Johannesburg later this year.

Sector and regional diversification might help to mitigate risk for listed property in South Africa, but it is offshore diversification in particular that is helping to cushion blows.

Hedging against local events

Nowadays, 47% of the SA Listed Property Index (SAPY) is offshore exposure, 29% in Central Eastern Europe (CEE). SA Reits have 12% exposure to this strong growth region.

Topping the list for offshore exposure among SA’s Reits is Vukile with almost half its portfolio abroad, 45% invested in Spain through Spanish subsidiary Castellana Properties, and 4% in the UK. Thirty five percent of net property income comes from Spain.

Growthpoint’s offshore assets in Australia, Romania and Poland now make up 31% of its portfolio and contribute 22.5% of earnings, while Redefine’s international exposure sits at 20%. Its assets in the UK, Poland and Australia currently contribute 25.4% to income.

Retail-focused Hyprop Investments’ offshore exposure in South-Eastern Europe (SEE) accounts for roughly 19% of its portfolio.

In May, Emira increased its offshore exposure to around 12% after adding two more shopping centres to its US portfolio. Emira also holds a 3.3% stake in Growthpoint Properties Australia (GOZ).


The SAPY has already clawed back 6.04% this year (January to June) and looks set to recover further.

2020 is expected to see a return to higher total returns as capital return becomes more relevant, according to Zondo.

E-commerce sales appear to be a driver of the more resilient industrial sector (specifically in warehousing and logistics) where tenant demand is strong and vacancies are low. Online spend in SA increased 19% in 2018, according to PayPal and Ipsos, and a 36% increase is forecast for 2020.

For the year to May 2019, listed property underperformed most other asset classes, generating total returns of 3.8% against equities (7.1%), bonds (5.3%), and cash (3%), reports Sapoa. But as a long-term investment over ten years to 31 May 2019, it still trumps other asset classes with total returns of 12.6%.

Currently, SA Reits offer attractive yields and on a 12-month view are fairly priced, says Zondo.

Following the Resilient stable allegations, the asset class, historically regarded as a leader in corporate governance, is updating its best practice recommendations. This could, of course, drive investor and stakeholder confidence in SA’s listed Reit sector.

But it’s all about returns, and the money that follows.

“We need over 2% growth in GDP to have positive sentiment in the [listed property] sector,” says Zondo.

For emerging market investors, SA may not offer the same rewards as other African countries, but it is a clear winner in terms of risk and access, says Barnaby Fletcher, senior analyst for Southern Africa at Control Risks.

And it is the only country in Africa with Reit dispensation. “There is a lot to recommend South Africa. It needs to sell itself better,” he says.

Evan Robins, portfolio manager at Old Mutual Investments, says: “You won’t get the rental growth overseas that you get in South Africa. But you cannot invest in SA property for the short-term. It has to be a long-term horizon.”

Stanlib expects total returns for SA listed property of 8.4% for 2019.

Sapoa president David Green anticipates growth to be slow over the next 18 months but concludes on a high note. “We are at the end of a property cycle; the only way is up.”

This is an extract of an article that originally appeared in the 25 July edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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