Positive rate outlook expected to be a boon for property barons
SA’s listed real estate investment trusts (Reits) which ended 2023 on a strong footing, delivering an impressive return of 9.9% in December, are expected to perform this year with the improving interest rate outlook, asset managers say.
The best-performing listed property counters on the JSE in December were Lighthouse Capital, Hyprop Investments, and Equites Property Fund, which all delivered double-digit growth.
Investment analysts at wealth and asset manager Anchor Capital said SA Reits trade at an attractive forward dividend yield compared with five years ago.
“For the first time in recent years, we are projecting a higher total return for SA-listed property (12%) than domestic equity and SA bonds. After a few years of poor performance, SA property eked out a double-digit return but still trades at an average 30% discount to NAV (net asset value) and a forward distribution yield of around 13% for local portfolios and 8% for global portfolios (primarily Central and Eastern Europe),” the analysts said in a strategy and asset allocation note.
“Property fundamentals and the cost of money drive property/Reit share prices. Interest rates appear to have peaked globally and in SA, and the cost of money will become meaningfully cheaper over the next 12 months.”
SA investors have over the past decade had a love-hate relationship with listed property. The FTSE/JSE SA Listed Property Index lost 62.6% of its value between January 1 2018 and October 31 2020.
Most of the drawdown occurred during the outbreak of the pandemic, which saw many people working from home.
Anchor Capital said offshore portfolios are performing better, and growth prospects look reasonable. “Our pick of the property sector is MAS PLC, where the share price took a dive when it announced that it would hold back on dividends for two years to fund developments. At a 15% forward distributable income yield, we think the share is worth over 50% more.”
Anchor Capital’s enthusiasm about offshore property portfolios is shared by one of SA’s biggest asset managers, Stanlib.
Nicolas Lyle, portfolio manager at Stanlib, said numerous studies over the past 20 years have shown that SA investors without exposure to global Reits have missed out on diversification and hard currency returns.
“We expect global property will deliver a total return in dollars of about 10% in 2024, driven by current mid-single-digit dividend yields and mid-single-digit growth in free cash flow. Valuations are not stressed: global Reits are on average trading at 15-year average multiples,” Lyle said. “We are at the top of the interest rate cycle looking down and ahead. Falling interest rates would add upside to our base case, whereas signals of an accelerating recession (such as a sharp rise in unemployment or a drop in house prices) would cool our enthusiasm.”
The expected cut in interest rates both in SA and major markets in 2024 has raised expectations of money managers that the property sector might outperform.
Evan Robins, head of listed property portfolio manager Old Mutual Investment, said while SA listed property is unlikely to return to pre-Covid levels any time soon, given current local economic dynamics the surprising performance of listed property in the 2023 asset class leader board at the end of the year marks a more optimistic outlook for the year ahead.
Anchor Capital expects SA’s banks to continue delivering high returns for shareholders.
“The high interest rate environment has been a kicker to banks’ earnings for the last few years, while lending books have proven resilient in the face of weakening local operating conditions. With interest rates expected to have peaked for this cycle, the tailwinds to the banks’ earnings should start to recede towards the back end of 2024,” the company said.
“As many domestically focused companies’ earnings have deteriorated over the last few years, the resilience of the banks’ earnings resulted in us taking a constructive stance on the sector. In aggregate, we expect the banking sector to continue to grind out high-single-digit earnings growth with close to double-digit dividend yields for mid- to upper-teen total returns.”
S&P Global Ratings last week said SA banks are largely immune to the headwinds facing the domestic economy.
The ratings agency expects the sector to report risk-adjusted returns of 15%-16% on average in 2024.
Anchor Capital said SA businesses, including retailers, have largely adapted to load-shedding. The asset manager said retailers went into the 2023 festive season with too much inventory they could not sell and spent much of the first half discounting stock and having to invest in different ways of keeping the lights on.
“Some retailers were more effective in adapting to the changing conditions, a good example being Shoprite, which had the luxury to spend disproportionately on diesel and effectively capture market share at the expense of Pick n Pay and Spar which, due to cash flow constraints, did not have the same luxury.”
WE EXPECT GLOBAL PROPERTY WILL DELIVER A TOTAL RETURN IN DOLLARS OF ABOUT 10% IN 2024
Nicolas Lyle
Stanlib portfolio manager