Financial Mail - Investors Monthly
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Our top property share picks
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). ●