Lit­tle ap­petite for shares

The slump in listed prop­erty prices has pushed div­i­dend yields to 10-year highs, but in­vestors are not con­vinced of value

Financial Mail - - MONEY&INVESTING - Joan Muller

When are in­come chasers likely to start buy­ing prop­erty stocks again?

That’s the mil­lion-dol­lar ques­tion on many peo­ple’s minds as the neg­a­tive sen­ti­ment that has led to the sec­tor’s un­prece­dented 23% de­cline (in to­tal re­turn) in the year to date lingers. The slump com­pares with a 17% to­tal re­turn achieved by the SA listed prop­erty in­dex (Sapy) last year, and is the sec­tor’s worst per­for­mance in more than 20 years.

There have been only three other pe­ri­ods since 1995 when prop­erty stocks de­liv­ered a neg­a­tive re­turn: 1996, 1998 and 2008. But these de­clines were not nearly as se­vere as that of this year, which ranged from a 1% drop to a 16% fall (see graph).

This year’s share price de­cline was ini­tially trig­gered by a sell-off of the Re­silient sta­ble of shares in Jan­uary and Fe­bru­ary fol­low­ing al­le­ga­tions of in­sider trad­ing and share ma­nip­u­la­tion.


The mat­ter is the sub­ject of a pro­tracted and as yet un­re­solved probe by the Fi­nan­cial Sec­tor Con­duct Author­ity (FSCA).

While the four com­pa­nies as­so­ci­ated with the Re­silient group — Fortress Reit, Re­silient

Reit, Green­bay Prop­er­ties and Nepi Rock­cas­tle — have led the sec­tor’s de­cline, with share prices slump­ing be­tween 40% and 64% this year at the time of writ­ing, a num­ber of other real es­tate stocks have also been sold down in re­cent months. These in­clude rand hedge plays such as MAS Real Es­tate, Trade­hold, Ham­mer­son and Intu Prop­er­ties, as well as Sa-fo­cused Re­bo­sis Prop­erty Fund, Tex­ton Prop­erty Fund and Bal­win Prop­er­ties.

Share price weak­ness has pushed the Sapy’s for­ward div­i­dend yield to close to 10%, a level last seen dur­ing the 2009 re­ces­sion (see graph).

That means that prop­erty stocks are now the cheap­est they have been in a decade. In fact, as many as 42 out of the sec­tor’s 50-odd coun­ters are trad­ing at a dis­count to NAV — some of more than 40%, for ex­am­ple Ham­mer­son, Cap­i­tal & Re­gional, Trade­hold, Re­bo­sis, Tex­ton, Tran­scend, Ac­cel­er­ate Prop­erty Fund, Delta Prop­erty Fund and Hos­pi­tal­ity (B).

So why aren’t value in­vestors climb­ing back in? An­a­lysts say it is dif­fi­cult to pre­dict when ap­petite for prop­erty stocks is likely to re­cover, con­sid­er­ing how many con­cerns now weigh on in­vestor con­fi­dence. These in­clude on­go­ing po­lit­i­cal and eco­nomic uncer­tainty, the land ex­pro­pri­a­tion is­sue and the lower-than-ex­pected earn­ings growth that was de­clared by a num­ber of prop­erty com­pa­nies for the June­july-au­gust re­port­ing pe­ri­ods on the back of higher va­can­cies and softer rentals.

The lat­est fig­ures from Cat­a­lyst Fund Man­agers show that div­i­dend growth among prop­erty stocks has slowed to an av­er­age 8.8% in 2018, down from 12%-15% a year in the pre­ced­ing three years.

Cat­a­lyst Fund Man­agers in­vest­ment an­a­lyst Im­daad Nana says down­ward re­vi­sions of growth ex­pec­ta­tions have con­tin­ued dur­ing the re­cent re­port­ing pe­riod due to the re­ces­sion­ary eco­nomic cli­mate, which has cur­tailed con­sumer spend­ing and busi­ness ex­pan­sion.

“In ad­di­tion, the reper­cus­sions of dis­tribut­ing non­re­cur­ring, un­sus­tain­able in­come in prior pe­ri­ods have be­come un­avoid­able,” he writes in Cat­a­lyst’s lat­est monthly prop­erty re­view. He is re­fer­ring to the trend among prop­erty com­pa­nies to boost div­i­dend pay­outs by adding one­off fees or trad­ing prof­its to dis­tributable rental in­come, which is now forc­ing many to re­base their earn­ings down­wards.

Keillen Ndlovu, head of listed prop­erty at Stan­lib, cites the po­ten­tial fail­ure of Ed­con as an­other con­cern for prop­erty in­vestors, con­sid­er­ing the ex­po­sure that Sa-fo­cused real es­tate stocks have to the re­tail sec­tor.

About 53% of the sec­tor’s as­sets con­sist of shop­ping cen­tres and other re­tail prop­er­ties, which far out­weighs the ra­tio of of­fices and in­dus­trial build­ings. “A clearer strat­egy on Ed­con’s pro­posed store clo­sures will help im­prove sen­ti­ment,” he says.

So too will clar­ity about the land ex­pro­pri­a­tion de­bate. Also, Ndlovu says the ea­gerly awaited con­clu­sion of the FSCA’S in­ves­ti­ga­tion

Source: Stan­lib Re­search

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