‘Likely’ credit rating downgrade: what this means for listed property
Listed property in SA has enjoyed a decade of sumptuous returns, culminating in last year’s listing frenzy. But since the end of October, both the listed property and REIT indices are down some 14%, caught up in a global sell-off as well as fears that int
Is this going to be a year of hard knocks for listed property?
I don’t think it’s going to be quite as severe as all that. Clearly, we’re in a bad cycle, and it’s a case of “Have the guys running these businesses taken the correct precautions to make sure they come out of this bad cycle?”
If you look at South Africa’s REITs [real estate investment trusts], the majority have some form of offshore exposure, and that’s almost across the world: Australia, the Far East, the UK and Europe.
They have taken some steps to hedge their bets in terms of being completely reliant on South Africa. I don’t think a lot of this is unexpected in terms of either interest rates or the commodities down-cycle.
The debt-to-equity levels for most listed property groups is probably around 30% to 40% . . . will that be manageable with higher interest rates?
I’d probably argue with you on that number — it’s a lot closer to the 30s or below . . . the vast majority of those companies are quite well hedged in terms of interest rate products; everyone has expected this interest rate increase.
If they’re worth their oats, which a lot of them are, they have taken the precautions to make sure their personal debt levels are not too high.
The business of Fortress has mainly been retail centres clustered around transport nodes, and in smaller towns and outlying areas. Are these areas especially fragile to the economic downturn?
If you look at the environment in which we operate, the depreciation of the rand and interest-rate increases probably only affect a small part of the population. The impact on smaller towns is the commodity cycle and the drought. In those areas there is a reliance on the government grant and I don’t think anything is going to change in terms of the grant, but the drought and the commodities cycle will have an impact.
Where changes do occur relates to more malls being built. That there is an oversupply is probably more of a concern.
With a market cap of about R49-billion, you’re bigger now thanks to your Capital Property acquisition. You’re also part of the MSCI emerging markets index. Given what’s happening to emerging markets, is that a poisoned chalice?
No. It does open up the fund to other investors worldwide. Yes, obviously the depreciation of the rand will have an impact. But currency depreciation has occurred in other MSCI markets.
What concerns us more is any potential downgrade in the sovereign rating — the chances of that are probably more of a downgrade than not.
How would a downgrade affect listed property?
Across the board the impact on South Africa would be large.
There’s a forced sell that would happen on the equity and gilt markets by international funds. But, having said that, I think the property stocks are trading at very good forward yields, so the people who live here, who have their money here, are getting very good opportunities.
The average pensioner who is probably not that interested in the day-to-day fluctuations of the share price, is more interested to know that they are going to get sufficient dividends, and I think the dividend yields of some of the funds are looking very attractive.
If I were a pensioner or sitting on a nest egg and not knowing what to do with my money, I would certainly recommend that property REITs be one of the best investments you can make at the
moment.
But you’re obviously talking your book here, and many brokers and fund managers are saying that now is a terrible time to buy property stocks.
I would understand where they are coming from because there is an alignment between bond and property yields. They tend to travel in the same direction, but the difference with property is that it generally tends to have an annual escalation, or a way of improving the value of the asset.
If you have a retail shopping centre, there’s the possibility of turnover clauses, or extensions.
Maybe the office sector is in a bad cycle, or the manufacturing industry, but generally a lot of these funds have exposure to either multiple assets, or big exposure to offshore markets.
And I don’t think the real impact of the rand devaluation has been felt yet in terms of these companies and offshore investments — you haven’t seen those distributions come in yet.
Talevi is a BDTV presenter