Offshore stocks tops
LOCAL INSTABILITY: SA ECONOMY AND POLITICAL RUCTIONS STACK UP
More than 40% of the Sapy index is exposed to foreign currency earnings, versus 0% a decade ago – Stanlib. Moneyweb
Offshore real estate stocks have emerged as the best performers so far this year, compared with SA-focused stocks that face a precarious outlook, given the worrying state of the economy.
The SA-listed property index (Sapy), comprising the JSE’s 20 largest real estate stocks, has delivered 10.5% total returns in the year to November 27, according to Stanlib’s latest figures.
The Sapy index has included offshore counters and hybrid counters (with SA and offshore exposure), at the expense of pure SA-focused real estate stocks, helping the index deliver positive total returns.
The sector’s winners are largely offshore stocks, while SA-focused stocks dominate the losers.
Europe- and UK-focused Greenbay Properties comes out tops with a total annual return of 68%, followed by Germany-focused Sirius Real Estate (57%), Europe-focused MAS Real Estate (47%), and UK-focused Atlantic Leaf Properties (26.5%).
The losers are mostly companies that generate the bulk of their earnings from SA-based office, retail, industrial and residential properties. This includes Balwin Properties, shedding 34.3% in total returns, Arrowhead Properties (-27%), Accelerate Property Fund (-26.5%) and Octodec Investments (-23.4%).
Investor concerns about the domestic economy came to a head when a number of SA-focused companies recently posted results in which rental reversions on their property portfolios were either flat or negative and vacancies increased, resulting in slashed dividend forecasts.
The share prices of local counters are down 5% to 29% in the year to November 28, while their offshore counterparts are up 4% to 68%.
A key driver in the outperformance of offshore real estate companies is rand exchange movements. A weak rand against the euro (companies report results in euros or have European operations) of 14% year-to-date has helped boost offshore counters’ share prices and earnings.
Another is low interest rates and higher yields on property developments or acquisitions, which boosts earnings, said Ahmed Motara at Stanlib. “This is a driver of strong earnings growth for the offshore companies, in many instances above the earnings growth that companies with largely South African portfolios can achieve.”
The deterioration of the domestic economy and political climate has prompted SA-focused real estate companies to search for offshore opportunities, said Anas Madhi of Meago Asset Managers.
More than 40% of the Sapy Index is exposed to foreign currency earnings, whereas the sector had no foreign exposure 10 years ago, according to Stanlib.
The fact that offshore counters are the best performers doesn’t necessarily mean they’re good bets. Motara said investors must have a good understanding of a company’s property portfolio quality, management team and the dynamics of the country it operates in.
“We are wary of investing in property companies that are merely engaged in financial engineering to generate earnings growth, without the property portfolio dynamics to support sustainable earnings growth.”