The building bricks of opportunity

The property sector put in a great performance in 2021, admittedly off an awful base. If you bought STXPRO, the Satrix property exchange traded fund (ETF), at the start of 2021 you would have gained more than 30% in value at the end of 12 months. Sadly, a nasty drop since then means you would now be less than 10% up from your entry price.

That ETF is now trading about 40% lower than at the start of 2020, before the pandemic broke the property sector. Expressed differently, it would take a 66% gain to get back to those levels. This is either a heartbreak or an opportunity, depending on when you entered a position in this sector (if at all).

Property funds trade based on yield, as most investors are interested in the sector because of the supposedly stable income it brings. The pandemic taught us that this is by no means guaranteed, with a vastly different experience for investors depending on the underlying portfolios.

Stor-Age stands apart from the rest, with a business model that you can’t buy anywhere else on the JSE. The share is almost back to pre-Covid levels, having recovered from its status as the baby thrown out with the bathwater. Stor-Age was one of my better swing trades in 2020, as I took advantage of a silly scenario in which it was sold off just as severely as retail and office funds. You didn’t need a PhD to figure out that self-storage properties and retail properties have completely different fundamentals.

The worst type of property

At the other end of the spectrum, we find funds that are now in ICU and almost on life support. Rebosis is one of them; a deal to sell R3.3bn worth of office properties that seemed too good to be true turned out to be exactly that. Vunani Capital tried to put together the funding to buy the properties and failed, so Rebosis remains the proud owner of a huge portfolio of the worst type of property for this environment.

The Rebosis A ordinary shares have lost 97% of their value over the past five years and nearly half of their value over the past month. This is a useful reminder that a share can technically keep losing half its value until it reaches 1c a share. Put differently, you can still get a bloody nose from a company that has already endured 12 rounds with a boxing champion. Tread carefully, always!

It’s worth noting that the unsustainably low yields of industrial property funds in 2021 are quickly reversing. Sirius has been smashed more than 40% this year, after trading at a ridiculous premium to NAV that I warned about many times last year. When it comes to property funds, you need to be careful when they are trading at a premium to NAV. Due to the accounting requirement to carry properties at fair value, the NAV is a decent approximation of what a property fund would be worth if it sold everything and settled its debt. By investing at a premium to that, you’re looking for trouble.

As the leasing of residential property just isn’t a business that I’m capable of getting excited about (I find it hard to see how a fund can achieve appealing returns in the sector), this leaves us with retail and office property portfolios. There are many funds on the JSE with that mix of exposure, though they vary drastically in quality and by region.

There are smaller funds that have clearly articulated strategies, such as the Spear real estate investment trust, which focuses on the Western Cape, and Attacq, which builds precincts and actively manages them (Waterfall City is a case in point). There are larger funds that try to own everything, with Growthpoint the most extreme example. Either type can be a great or a terrible investment.

I decided to have a punt on Hyprop this week, particularly after the JSE gave me a gift in the form of the price dropping more than 5% on the day before I entered my position. My thesis is simple: with mask mandates gone, people are more likely to return to malls. We’ve seen this happen in Eastern Europe. Some due diligence last Friday night at Canal Walk was supportive of this view, especially during loadshedding. The mall shone as a beacon of hope in the night, with queues of cars waiting to park.

Trading at a substantial discount to NAV and way off pre-pandemic levels, I think there’s an opportunity here.