TIME TO PILE IN WHILE THE GOING IS CHEAP
Listed property seems poised for a rebound following a dismal 2018, but income chasers need to be more discerning than ever in their stock selection, writes Joan Muller
Property punters are no doubt still reeling from last year’s value destruction when the SA listed property index (Sapy) tumbled 30% in what was the sector’s worst performance in more than 20 years. For some, the losses were far more pronounced — backers of Rebosis Property Fund B, Resilient Reit, Fortress Reit B, Intu Properties, Nepi Rockcastle, Tradehold, Capital & Regional, Delta Property Fund and Balwin Properties suffered capital losses of between 40% and 70%.
The upside of last year’s decline is that it has created cheap buying opportunities for investors who are underweight in property, particularly those looking for a high and growing income stream.
At least a dozen Sa-focused real estate investment trusts (Reits) are now trading at juicy dividend yields exceeding 11%. The sector as a whole — comprising about 60 counters — is trading at a record 9.3% dividend yield.
Though offshore property counters typically trade at lower initial dividend yields than their Sa-focused counterparts, a number of rand hedge counters now offer higher income growth prospects.
So there’s good value to be had among both Sa-focused and rand hedge property counters, says Metope Investment Managers CEO Liliane Barnard. “And in turbulent times, cash is king.”
She says that for the first time since 2009, Sapy is trading at a forward yield that is higher than that of long-term bonds, despite the 7% recovery in share prices already recorded by the Sapy year to date (to February 19). “That creates an attractive entry point into listed property,” says Barnard.
The sector is also looking cheap from a NAV perspective. Keillen Ndlovu, head of listed property funds at Stanlib, says the sector is trading at an average 10% below NAV versus its historic 11.3% premium to NAV. The last time that the sector was trading at such a sizeable discount was a brief period in late 2008/early 2009 following the global financial crisis.
Though listed property valuations look compelling, analysts warn that there is still a number of headwinds that face the sector. The market is awaiting the outcome of the Financial Sector Conduct Authority’s investigation of allegations of insider-related trading and share price manipulation against Resilient Reit and its associate companies including Fortress Reit, Nepi Rockcastle and Lighthouse Capital (former Greenbay Properties). Last year’s sell-off of property stocks was triggered by these allegations. While governance concerns are already reflected in their share prices, it is still unsure when or if they will be cleared of any wrongdoing.
There has also been rising pressure on property companies’ earnings on the back of weak consumer spending and a stagnant economy, which has dampened demand for retail, office and industrial space. Dividend growth for the sector already slowed to an average 6% in 2018 — almost half the average 10% achieved in 2017.