Property sector’s reports disappoint

Most reporting companies underdeliver amid slow growth and wariness after Resilient woes

Only two of the 17 property companies that released financial results in the latest reporting period outperformed their dividend expectations. Some were in line with their market forecasts but most underdelivered.

Only two of the 17 property companies that released financial results in the latest reporting period outperformed their dividend expectations. Some were in line with their market forecasts but most underdelivered.

The property sector’s share values may be recovering somewhat, but there is still a long road ahead to attract investors who were scared off after the huge R120bn sell-off in the past year that was sparked by the scandal that engulfed the Resilient stable of companies.

Head of listed property funds at Stanlib, Keillen Ndlovu, said he and fellow fund managers in the country have had to temper their expectations for 2019 returns from the sector, which is valued at about R560bn.

Gone are the days of doubledigit dividend growth for the listed property sector, whose boom period is long over. The industry had outperformed JSE equities for nearly a decade, but in 2018 fell off a cliff when it returned a total loss of 25.26%.

The worst performance in the sector’s history began with a sudden sell-off in the shares of the Resilient stable of companies, including Resilient, Fortress, Lighthouse Capital and Nepi Rockcastle.

Reports were released by asset managers suggesting the companies were overvalued and had used related part deals to inflate profits. Three of the companies have been cleared of all wrongdoing by the Financial Sector Conduct Authority.

Resilient has been cleared of insider trading but the market regulator is still investigating allegations of price manipulation and the reporting of false and misleading information about the company.

But the property sector’s recovery has been slow in the first eight months of 2019, with the FTSE/JSE SA Listed Property Index’s total return being 1.03% while the JSE All Share returned 6.88%, cash 4.83% and bonds 7.87%.

Fund managers such as Ndlovu, who said in October 2018 he expected dividend growth of between 5% and 7% for 2019, have seen their expectations squashed.

“There were more negative surprises and the outlook is worse than expected. We are now expecting 0% to 1% dividend growth,” he said.

“It’s a tough time for listed property management as they have to work hard to fix the balance sheets, bring the debt levels down, manage rising vacancies, arrears and bad debts, and get rental growth where possible, which is challenging at the moment,” Ndlovu said.

Only European mall owner MAS Real Estate and Waterfall City-focused Attacq managed to grow their dividends ahead of market expectations in the latest reporting season.

MAS’s dividend grew 15% and Attacq’s increased 10.1%, both in the year ended June. The companies are forecasting 30% and between 8% and 10% dividend growth respectively for the 2020 financial year.

MALL OWNERS

But other funds have disappointed. Mall owner Resilient saw its dividend fall 6% in the year to end-June, in line with expectations, while Polish mall owner EPP’s dividend did not grow at all in the six months to June, also in line with forecasts.

Among the duds this reporting season were Fortress, which saw its B-share dividend shrink 13.1% in the year to end-June, SA’s largest property company Growthpoint, which achieved only 4.6% in the year to June, close to a consumer price inflation average of 4.5%, and SA Corporate Real Estate, whose dividend slipped 6.1% in the six months to end-June.

Craig Smith, head of research at Anchor Stockbrokers, said investors needed to wait out a difficult period, but the listed property sector still offered returns over the medium to long term. He said some funds were holding back dividends as they needed cash.

“Property companies have largely rebased distributions, though there is a possibility of further disappointing guidance from counters in the next reporting round, after which [there should be further] rebasing,” said Smith.

“Share prices largely reflect the bad news, so we still maintain it is an attractive entry point now on a three- to five-year view,” he said.

Growthpoint group CEO Norbert Sasse said the company was expecting its 2020 financial year to be difficult as tenant demand was weak for retail and office space and the economy was struggling to grow.

THERE WERE MORE NEGATIVE SURPRISES AND THE OUTLOOK IS WORSE THAN EXPECTED. WE ARE NOW EXPECTING 0% TO 1% GROWTH