Listed prop­erty:

Time to cherry-pick?

Financial Mail - Investors Monthly - - Front Page -

The dis­mal per­for­mance of the listed prop­erty sec­tor yearto-date — the SA listed prop­erty in­dex (Sapy) is down more than 20% in the seven months end­ing July — has no doubt prompted prop­erty pun­ters to re­assess their in­vest­ment strate­gies.

This year has been the listed real es­tate sec­tor’s worst in terms of share price per­for­mance in 20 years. While the sharp sell-off was ini­tially trig­gered by con­cerns around the cor­po­rate struc­ture and al­le­ga­tions of in­sider-re­lated trad­ing against the Re­silient group of com­pa­nies (Re­silient Reit, Fortress In­come Fund, Nepi Rock­cas­tle and Green­bay Prop­er­ties), in­vestor sen­ti­ment has also been dented by SA’s weak eco­nomic growth out­look, a de­te­ri­o­rat­ing op­er­a­tional per­for­mance, slower div­i­dend growth, and un­cer­tainty cre­ated by the ex­pro­pri­a­tion of land without com­pen­sa­tion de­bate.

Lat­est fig­ures from Cat­a­lyst Fund Man­agers show listed prop­erty was the worst per­form­ing as­set class by far with a to­tal re­turn of -22%. That com­pares to a -2% to­tal re­turn for gen­eral eq­ui­ties and 4.2% and 6.6% for cash and bonds re­spec­tively.

How­ever, in­dus­try play­ers be­lieve the cor­rec­tion has been over­done: prop­erty stocks are now trad­ing at record high yields, with as many as 20 out of the sec­tor’s 50-odd coun­ters of­fer­ing in­come chasers yields of be­tween 10% and 18%. That of­fers value rel­a­tive to longterm SA gov­ern­ment bond yields, which are sit­ting at around 8.8% (mid-Au­gust). Off­shore com­pa­nies are sim­i­larly trad­ing at for­ward yields ahead of their re­spec­tive long-term gov­ern­ment bond yields.

Craig Smith, head of re­search at An­chor Stock­bro­kers, says listed prop­erty looks at­trac­tively priced com­pared to other as­set classes. But he be­lieves prop­erty in­vestors should mod­er­ate their longterm growth (and long-term to­tal re­turn) ex­pec­ta­tions.

An­chor Stock­bro­kers is fore­cast­ing an an­nual to­tal re­turn for listed prop­erty of 12%-14% (com­pounded an­nu­ally) over the next three to five years, which Smith notes is lower than the av­er­age 18%/year to­tal re­turn de­liv­ered by the sec­tor over the past 15 years (end­ing June). He ex­pects dis­tri­bu­tion (or div­i­dend) growth for the sec­tor to slow to 6% over the next 12 months, down from 9%-10% in 2017.

A num­ber of fac­tors that sup­ported the sec­tor’s out­per­for­mance are no longer present or are less sig­nif­i­cant than 1015 years ago, says Smith. One is the in­creased weight of cap­i­tal that has been al­lo­cated to listed prop­erty in re­cent years, which aided the sec­tor’s rerat­ing ver­sus bonds.

“Due to the size of the listed sec­tor, this tail­wind, with a few oth­ers, will be less im­por­tant in fu­ture,” says Smith. He be­lieves the sec­tor’s growth will also be cur­tailed be­cause there are fewer “un­der­man­aged” in­sti­tu­tional-grade qual­ity as­sets avail­able for pur­chase from in­sti­tu­tions and con­glom­er­ates.

How­ever, Smith says a to­tal re­turn of 12%-14% a year is a more re­al­is­tic and ac­cept­able re­turn for listed prop­erty. “Listed prop­erty is a hy­brid be­tween an equity and a bond, so in­vestors should be com­fort­able with a re­turn pro­file lower than eq­ui­ties but higher than bonds given that listed prop­erty cash flows are more pre­dictable and se­cure than eq­ui­ties but less so than bonds.”

Nev­er­the­less, he stresses that though in­vestor sen­ti­ment to­wards real es­tate stocks in gen­eral may take time to re­cover, listed prop­erty is a sep­a­rate as­set class pro­vid­ing much needed di­ver­si­fi­ca­tion in any bal­anced port­fo­lio. “As such, in­vestors should re­main in­vested in listed prop­erty over the long term, while ac­knowl­edg­ing that rel­a­tive ex­po­sure can and should vary over time based on the sec­tor’s growth out­look and stage of the prop­erty cy­cle,” says Smith.

Kelly Ward, in­vest­ment an­a­lyst at Me­tope In­vest­ment Man­agers, agrees there is now value to be had in prop­erty stocks. While div­i­dend growth has cer­tainly ta­pered off from some of the high dou­ble-dig­its of 2015 and 2016, she still ex­pects the sec­tor to de­liver in­fla­tion-beat­ing growth of an av­er­age 7% for 2018 and 2019. “And given the high yields on of­fer, we be­lieve the sec­tor is poised to de­liver a to­tal re­turn of about 16% over the next 12 months,” says Ward.

The key ques­tion for in­vestors is: which in­di­vid­ual stocks of­fer the best buy­ing op­por­tu­ni­ties? SA-fo­cused prop­erty coun­ters with par­tial off­shore ex­po­sure ap­pear to dom­i­nate fund man­agers’ stock-pick lists, in­clud­ing the Vuk­ile Prop­erty Fund, Emira Prop­erty Fund, In­vestec Prop­erty Fund, Hyprop In­vest­ments and At­tacq, as well as Fortress In­come Fund and Re­silient Reit. Off­shore favourites in­clude Cen­tral and East­ern Euro­pean prop­erty play Nepi Rock­cas­tle and Pol­ish-fo­cused EPP.

In­vestec As­set Man­age­ment port­fo­lio man­ager Peter Clark says in­vestors should take a fresh look at At­tacq now that the com­pany is adopt­ing a real es­tate in­vest­ment trust (Reit) struc­ture, which will con­vert it from a cap­i­tal growth to an in­come fund. How­ever, he says At­tacq still of­fers an at­trac­tive de­vel­op­ment pipe­line in one of SA’s most prom­i­nent growth nodes — Water­fall near Midrand, one of the largest

mixed-use devel­op­ments in SA and an­chored by the Mall of Africa.

“So though the fund ap­pears to be low yield­ing, it will now pro­vide in­vestors with a com­bi­na­tion of sus­tain­able in­come and cap­i­tal growth through a pipe­line of lo­cal prop­erty de­vel­op­ment op­por­tu­ni­ties, some­thing that is hard to come by in the cur­rent listed prop­erty mar­ket,” says Clark.

At­tacq also holds a sub­stan­tial stake in UK- and Cen­tral and East­ern Europe-fo­cused MAS Real Es­tate, which pro­vides growth in the short term but can also be used as an ac­cre­tive fund­ing struc­ture to roll out the Water­fall de­vel­op­ment pipe­line. Af­ter the Reit con­ver­sion, At­tacq will ex­clude its de­ferred tax li­a­bil­ity, which Clark says will lead to a sub­stan­tial up­lift in net as­set value. “The NAV up­lift com­bined with the newly re­alised in­come yield and ex­ten­sive de­velop- ment pipe­line cre­ates a hy­brid in­vest­ment case that of­fers sub­stan­tial share price up­side.”

Clark also likes In­vestec Prop­erty Fund, which pro­vides a solid in­come plat­form through the longer-weighted av­er­age lease pro­file the com­pany has in its SA port­fo­lio of of­fices, shop­ping cen­tres and in­dus­trial build­ings com­pared to its peers. Earn­ings growth is driven by var­i­ous off­shore busi­nesses in which In­vestec Prop­erty Fund has in­ter­ests, in­clud­ing In­vestec Prop­erty Aus­tralia, Argo JV in the UK and the re­cently launched Pan Euro­pean lo­gis­tics ven­ture.

He ex­pects In­vestec Prop­erty Fund to out­per­form its peers on the div­i­dend growth front. The com­pany’s bal­ance sheet also re­mains within a rea­son­able com­fort zone be­low the 40% loan-to-value gear­ing level. “At a val­u­a­tion dis­count to both bonds and the sec­tor, IPF now pro­vides an at­trac­tive en­try point,” says Clark.

Me­tope’s Ward be­lieves Re­silient and Fortress B — the JSE’s worst per­form­ing prop­erty stock with a drop of 63% year-to-date — both of­fer sig­nif­i­cant value given the sharp de­clines from their De­cem­ber 2017 highs.

While the two com­pa­nies re­main un­der in­ves­ti­ga­tion by the Fi­nan­cial Sec­tor Con­duct Au­thor­ity for al­leged mar­ket ma­nip­u­la­tion, Ward says both have re­based their earn­ings over the past six months fol­low­ing crit­i­cism from the mar­ket. “We are con­fi­dent in Fortress and Re­silient’s abil­ity to de­liver on earn­ings growth.”

Ward says the as­sets un­der­ly­ing Re­silient’s per­for­mance are of a high qual­ity — its di­rectly held SA shop­ping cen­tre port­fo­lio is val­ued at R21bn and in­cludes flag­ship cen­tres such as The Gal­le­ria and Board­walk Inkwazi in KwaZulu-Natal, Mall of the North in Lim­popo and Highveld Mall and Se­cunda Mall in Mpumalanga. Re­silient also has stakes in Nepi Rock­cas­tle, the lead­ing re­tail prop­erty in­vest­ment and de­vel­op­ment group in Cen­tral and East­ern Europe with a port­fo­lio worth €5bn (R77.5bn), and Green­bay, which owns a €184m (R2.8bn) port- fo­lio of di­rect re­tail prop­erty and in­fra­struc­ture in­vest­ments and a fur­ther €800m (R12.8bn) in listed se­cu­ri­ties. Re­silient is trad­ing at a 10.3% his­toric yield ver­sus the Sapy’s 8.67%.

Ward says Fortress B of­fers in­vestors an 11.8% div­i­dend yield with above-in­fla­tion growth of about 6% a year over the next three years. Fortress has a large port­fo­lio of mod­ern lo­gis­tics fa­cil­i­ties leased to na­tional and in­ter­na­tional bluechip tenants, as well as re­tail cen­tres lo­cated close to trans­port nodes or in CBDs, which typ­i­cally cater to lower-in­come shop­pers and gen­er­ate strong de­mand from na­tional re­tail­ers.

“We be­lieve Fortress’s strat­egy of re­cy­cling cap­i­tal from non­core of­fices into new in­dus­trial devel­op­ments with bet­ter lease covenants and stronger cap­i­tal growth prospects will de­liver above­mar­ket div­i­dend growth in fu­ture.”

Both Clark and Ward sin­gle out Vuk­ile as an­other good buy. The com­pany owns a qual­ity port­fo­lio of SA shop­ping cen­tres in­clud­ing stakes in the East Rand Mall, Dob­sonville Mall in Soweto and Gugulethu Square in Cape Town. It also has a stake in Fair­vest, which owns a port­fo­lio of shop­ping cen­tres that cater mainly for low­er­in­come shop­pers.

Ward says man­age­ment’s off­shore ven­tures have been very suc­cess­ful. The lat­ter in­clude an in­di­rect in­vest­ment in the UK through At­lantic Leaf Prop­er­ties as well as a port­fo­lio of re­tail cen­tres bought in Spain, one of the high­est eco­nomic growth re­gions in West­ern Europe. She be­lieves Vuk­ile’s Span­ish foray will pro­vide plenty of sup­port for above­mar­ket dis­tri­bu­tion growth in the medium term. She notes that the com­pany trades on an at­trac­tive for­ward yield of 9.4%, with div­i­dend growth fore­cast at an av­er­age 7.3% a year for the next three years.

Listed prop­erty is a sep­a­rate as­set class pro­vid­ing much needed di­ver­si­fi­ca­tion in any bal­anced port­fo­lio. As such, in­vestors should re­main in­vested over the long term

Pic­ture: 123RF — YURIY CHABAN

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