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It wasn’t that long ago — late De­cem­ber 2017 to be ex­act — that the SA listed property in­dex was still test­ing new highs.

A num­ber of blue chips were trad­ing at record-low div­i­dend yields of sub-5% and de­mand for property scrip seemed never-ending. In­vestors con­tin­ued to sup­port the growth am­bi­tions of the JSE’s 60-odd coun­ters via multi­bil­lion-rand book builds, new list­ings and merg­ers & ac­qui­si­tions ac­tiv­ity.

How times have changed. Year to date, the sec­tor has raised no more than R1.8bn in new cap­i­tal — way less than last year’s R14bn and a frac­tion of the R40bn-R50bn a year that flowed to property stocks in the pre­ced­ing four years.

The sec­tor’s sharp re­ver­sal of for­tunes fol­lows last year’s 30% share price crash, ini­tially trig­gered by a sell-down in the Re­silient sta­ble of com­pa­nies fol­low­ing al­le­ga­tions of in­sid­er­re­lated trad­ing and share ma­nip­u­la­tion; most of these have since been re­futed.

In­vestors were fur­ther spooked by a weaker-thanex­pected earn­ings growth out­look fol­low­ing ris­ing va­can­cies and fall­ing rentals in many SAbased re­tail, of­fice and in­dus­trial property port­fo­lios.

UK-fo­cused property stocks also took a pound­ing due to

lin­ger­ing Brexit un­cer­tainty.

Though there were signs of a ten­ta­tive rebound in share prices ear­lier this year, the uptick has fiz­zled out in re­cent months, no doubt as more com­pa­nies started to re­port flat or even neg­a­tive div­i­dend growth. That com­pares to an av­er­age 10%-12% achieved be­tween 2014 and 2017.

How­ever, given the juicy div­i­dends now on of­fer — more than 20 property coun­ters are trad­ing at yields north of 10% — an­a­lysts say there is sig­nif­i­cant value to be had for patient pun­ters with a longer-term hori­zon. But there is also a clear mes­sage: head­winds could still af­fect property re­turns over the next 12 to 18 months.

Stan­lib expects the sec­tor to de­liver a to­tal re­turn (in­come and cap­i­tal growth) of 8.3% over the next 12 months, based on fore­cast div­i­dend growth of below 3% for the sec­tor as a whole. “Weak GDP growth, a poor fis­cal out­look and higher util­ity costs will con­tinue to im­pact earn­ings growth,” says Stan­lib se­nior property fund man­ager Nesi Chetty.

He warns that div­i­dend pay­outs could come un­der more pres­sure be­cause property com­pa­nies have to use re­tained earn­ings to sus­tain main­te­nance and other cap­i­tal expenditur­e costs. Ris­ing loan-to-value (LTV) ra­tios could trig­ger fur­ther val­u­a­tion write-downs. Com­pa­nies most likely to be af­fected by the lat­ter in­clude those with exposure to the rest of Africa, in­clud­ing At­tacq and Hyprop In­vest­ments, as well as UK-fo­cused Intu Prop­er­ties, Cap­i­tal & Coun­ties, Cap­i­tal & Re­gional, RDI Reit, Ham­mer­son and Trade­hold, among oth­ers.

But Chetty expects re­turns of SA real es­tate in­vest­ment trusts to re­cover as the econ­omy picks up and de­mand and sup­ply start to nor­malise. “The sec­tor is likely to start see­ing in­fla­tion-beat­ing div­i­dend growth again from 2021 on­wards and com­pounded to­tal re­turns in excess of 12% on a five-year ba­sis,” he says.

An­chor Stock­bro­kers real es­tate an­a­lyst Pranita Daya has a sim­i­lar out­look. She fore­casts a “base case” to­tal re­turn of 10.2% for the year to end-June 2020. “In our view, the mar­ket has al­ready priced in a lot of the weaker earn­ings growth po­ten­tial go­ing for­ward. In the long term, we ex­pect listed property re­turns to av­er­age be­tween 12% and 13%.” But, she says, SA property re­turns will re­main un­der pres­sure un­til ev­i­dence of sus­tained GDP growth of more than 2% a year starts to emerge.

Kelly Ward, in­vest­ment an­a­lyst at Me­tope In­vest­ment Man­agers, agrees that in­vestors will have to lower their re­turn ex­pec­ta­tions, as property in­come streams are likely to grow at a more mod­er­ate rate

than what in­vestors have be­come ac­cus­tomed to in the re­cent past. Me­tope, she adds, prefers to in­vest in con­ser­va­tively man­aged com­pa­nies that will be able to weather the weak econ­omy and fur­ther shocks in the form of a po­ten­tial ratings down­grade or an Eskom or Ed­con fail­ure.

In­vestors will also have to care­fully con­sider their po­si­tions in cer­tain coun­ters in light of the con­sol­i­da­tion trend that has emerged in re­cent weeks, which an­a­lysts say could lend share price up (or down) side to takeover or merger tar­gets. For in­stance, both Emira and Dip­ula have in re­cent weeks made a play for SA Cor­po­rate Real Es­tate; BEE en­ti­ties Re­bo­sis and Delta have an­nounced plans to merge; and Fair­vest has made an un­suc­cess­ful bid for Sa­fari, both of which are ex­posed to ru­ral and town­ship shop­ping cen­tres.

The key question is: which in­di­vid­ual property stocks now of­fer the best buy­ing op­por­tu­ni­ties? Chetty be­lieves the coun­ters that will gen­er­ate above-mar­ket re­turns over the short to medium term are UK and Western Euro­pean-fo­cused mall owner Ham­mer­son; Vuk­ile Property Fund, whose re­tail-fo­cused port­fo­lio is about 50/50 split be­tween SA and Spain; and SA-bi­ased In­vestec Property Fund (IPF). In­vestec As­set Man­age­ment port­fo­lio man­ager Peter Clark also counts Ham­mer­son among his top picks, along with Hyprop. Ward is bet­ting on Nepi Rock­cas­tle, MAS Real Es­tate and EPP, all three of which of­fer exposure to Cen­tral and East­ern Europe (CEE).

Chetty says while UK­fo­cused property shares have fallen sharply and con­tinue to be plagued by Brexit un­cer­tainty as well as tough re­tail trad­ing con­di­tions, Ham­mer­son stands head and shoul­ders above its peers in terms of the qual­ity of its port­fo­lio. The com­pany’s non-UK exposure, which ac­counts for al­most 50% of as­sets, also pro­vides a buf­fer against fur­ther po­ten­tial UK weak­ness. The com­pany trades at a 70% dis­count to NAV and a 13.5% div­i­dend yield.

“We be­lieve Ham­mer­son has been over­sold given its prospects,” says Chetty. He adds: “Nonethe­less, it’s likely go­ing to be a 12- to 18-month jour­ney be­fore in­vestors can look for­ward to a re­sump­tion in div­i­dend growth.”

Chetty also likes Vuk­ile be­cause of its long track record of de­liv­er­ing strong dis­tri­bu­tion growth through up- and down­cy­cles. He be­lieves Vuk­ile owns one of the most de­fen­sively po­si­tioned shop­ping cen­tre port­fo­lios in SA. The fund con­tin­ues to en­trench its pres­ence in the Span­ish re­tail mar­ket, hav­ing grown its port­fo­lio from €308m to €916m since it en­tered the coun­try two years ago. Chetty says Vuk­ile has a strong bal­ance sheet with an LTV ra­tio of 37%, and the com­pany trades at an at­trac­tive for­ward yield of 10.6% and a 10% dis­count to NAV.

IPF con­tin­ues to de­liver strong re­sults de­spite the stalling econ­omy and tough trad­ing con­di­tions. The com­pany also of­fers off­shore di­ver­si­fi­ca­tion via its well-timed in­vest­ment of €88.4m in a pan-Euro­pean lo­gis­tics plat­form. The lat­ter has exposure to the Nether­lands, France, Poland and Ger­many. Chetty says that with a con­ser­va­tive LTV ra­tio of 36% the fund is po­si­tioned to pur­sue fur­ther off­shore ac­qui­si­tions. IFP trades at a for­ward div­i­dend yield of 10.2% and is ex­pected to de­liver div­i­dend growth of 3%-5% in the 12 months to end-March 2020.

Clark be­lieves the neg­a­tive sen­ti­ment to­wards re­tail­fo­cused property stocks has been over­done. That ap­plies to Hyprop in par­tic­u­lar, which has seen its share price fall more than 30% over the past year. The com­pany owns dom­i­nant shop­ping cen­tres in­clud­ing the Rose­bank Mall and Hyde Park Cor­ner in Jo­han­nes­burg and Canal Walk in Cape Town.

Clark says the com­pany is mak­ing head­way in deal­ing with some of its is­sues, among oth­ers re­duc­ing its exposure to the rest of Africa, where it coowns a num­ber of struggling malls with At­tacq via AttAfrica. Two of these malls have been sold. Hyprop is trad­ing at a div­i­dend yield ex­ceed­ing 11%.

Ward con­tin­ues to see good value in the off­shore mar­kets, par­tic­u­larly in the CEE re­gions of Poland and Ro­ma­nia where wage growth is ahead of in­fla­tion and GDP is fore­cast to grow by a healthy 3%-5% this year and next. She notes that at around R130, Nepi Rock­cas­tle is trad­ing way below its De­cem­ber 2017 peaks of R216 — de­spite the Fi­nan­cial Sec­tor Con­duct Author­ity clear­ing the com­pany of all al­le­ga­tions of wrong­do­ing that were lev­elled against it last year by, among oth­ers, con­tro­ver­sial short seller Viceroy.

As the largest mall owner in CEE, Nepi Rock­cas­tle of­fers in­vestors good exposure to the fast-grow­ing CEE re­gion. The com­pany is ex­pected to achieve div­i­dend growth of 6% (in eu­ros) this year and trades on a div­i­dend yield of 7.4% .

MAS Real Es­tate re­cently be­gan the process of dis­in­vest­ing from Western Europe and de­ploy­ing the pro­ceeds into CEE through a joint ven­ture with de­vel­oper Prime Kapital, run by for­mer Nepi ex­ec­u­tives. MAS has also ac­quired an op­tion to pur­chase Prime Kapital’s man­age­ment plat­form, ex­er­cis­able be­tween 2022 and 2024. Ward says the com­pany should de­liver im­pres­sive div­i­dend growth of 15% for its 2019 fi­nan­cial year, which will ac­cel­er­ate to 30% a year in the three years to 2022.

Pol­ish-fo­cused mall owner EPP is ben­e­fit­ing from higher lev­els of con­sump­tion on the back of strong wage growth. “While the coun­try has some po­lit­i­cal chal­lenges and re­cently banned Sun­day trad­ing, which EPP is still di­gest­ing, we be­lieve the macro en­vi­ron­ment to be sup­port­ive of a re­tail in­vest­ment case,” says Ward. EPP of­fers a 10.3% div­i­dend yield (in eu­ros). ●

Nepi Rock­cas­tle’s Plaza Arena in Za­greb, Croa­tia.

Pranita Daya … priced in

Kelly Ward … mod­er­ate growth

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