Eastern Europe rising
The JSE’S battered real estate sector appears dirt cheap but property punters need to tread with caution, writes Joan Muller
t 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
Ilingering 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