Listed property: optimism prevails

Listed property could post double-digit total returns in 2019 as it rises from the ashes of its worst year in decades in 2018. Asset managers say the sector, valued at about R700bn, could achieve a total return of as much as 15% in 2019, taking capital and income growth into account, as long as no freak events occur.

Listed property could post double-digit total returns in 2019 as it rises from the ashes of its worst year in decades in 2018.

Asset managers say that the sector, which is valued at about R700bn, could achieve a total return of as much as 15% in 2019, taking capital and income growth into account, as long as no freak events occur. This would be a significant turnaround, as the sector has lost more than 20% in 2018 so far.

Property companies listed on the JSE, mostly income-paying real-estate investment trusts (Reits), have suffered in 2018, with many of the shares falling significantly. Listed property has registered a negative return of 21% in 2018, after the collapse in the share prices of the Resilient group of companies, which has wiped about R120bn off its market capitalisation.

These companies, including Resilient, Fortress, Nepi Rockcastle and Greenbay Properties, all experienced a strong sell-off in shares in January and their prices have not recovered.

Property has also been the worst asset class so far in 2018 on a purely share price basis, with the SA Listed Property sector (Sapy) losing 28.58% by 1pm on Tuesday.

This has been due to weak economic growth, low business confidence, struggling consumers and the sell-off in the Resilient group of companies, which occurred in January.

The next worst index was industrials, down 23.34%. The JSE all share was 14.33% lower compared with banks which had fallen 11.23%. Food and drug retailers had lost 12.43%, while general retailers fell 17.33%. Of the major indices, only the resources index has seen gains, with an increase of 11.21%.

Meago Asset Management head of research Ryan Eichstadt said several Reits had been forced to lower dividends because of deteriorating SA property fundamentals and the removal of a “previous reliance on unsustainable one-off items for growth”.

Stanlib analyst Ahmed Motara said the sector would be able to gain some momentum if funds continued “with business as usual. Listed property should bounce back next year as long as nothing out of the ordinary affects it in a negative way. I would think many asset managers are expecting listed property to do double-digit total returns next year, off a depressed base in 2018.

“We could see capital growth of about 6%, driven by sector income growth of 5% to 6% and a current sector dividend yield of over 9%. This would be supportive of near 13% total returns in 2019,” said Motara.

Eichstadt said his best-case scenario, which assumes stronger domestic growth, on a rolling 12-month basis forecast from the end of October, is a total return of 10%. His base case forecast, which assumes sluggish domestic growth, is a total return of 7%. His worst-case scenario, which includes contagion from emerging market debt and a currency crisis, is 4%.

Garreth Elston, a portfolio manager at Reitway Global said for the Sapy, he expects a total return of between 10% and 15%, but only if the country were able to avoid a downgrade and post a growth rate of about 2%.

“I think it is highly unlikely that we’ll see the same type of rapid recovery from market lows that the market saw in 2008 to 2009,” said Elston.

These forecasts show that listed property should manage to perform better in 2019 and weather a negative economic environment, which could include rising interest rates. Listed property prices and interest rates tend to have an inverse relationship.

A Bloomberg consensus of economists forecasts no interest-rate increases in 2019 or even 2020 because of prolonged weak economic growth. The Reserve Bank did, however, surprise the market when it said in its latest monetary policy review published on Monday that it expected interest rates to rise in the next two years, to help contain accelerating inflation.

Its quarterly projection model showed the interbank lending rate (repo rate) increasing from 6.5% to 7.7% by the end of 2020.