Financial Mail


Joan Muller


There’s plenty of rich pickings to be had among the JSE’S smaller property plays — provided you’re a patient punter with a higher risk appetite, writes

The days of property heavyweigh­ts such as Growthpoin­t, Redefine, Hammerson, Nepi Rockcastle, Resilient and Fortress trading at market caps north of R50bn, sizeable premiums to NAV of 30% or more and dividend yields below 7% seem a distant memory.

Over the past six to 12 months, property share prices have been decimated — more than 20 of the JSE’S 50-odd real estate counters have seen discounts to NAV widen to a colossal 75% or more. In addition, at least a dozen stocks are trading at ridiculous­ly high dividend yields of between 30% and 70%. That’s in stark contrast to the average 10%-12% on offer only six months ago.

The sector was already under pressure on the back of a stuttering economy and an ever-weaker earnings growth outlook. But the Covid-19 pandemic has accelerate­d its downward spiral. The value destructio­n has been particular­ly pronounced among real estate investment trusts (Reits) with exposure to shopping centres.

Perennial market darling Hyprop has lost more than two-thirds of its value over the past year — the mall owner’s market cap has shrunk from about R20bn to less than R5bn. That has pushed the counter’s discount to NAV to 78% and its dividend yield to 34%. Fourways Mall owner Accelerate’s discount to NAV is even more staggering at 92%, while its dividend yield exceeds 70%.

Offshore mall owners haven’t been spared, with equally horrific valuation losses recorded by UK mall owners Hammerson and Intu, as well as Eastern European-focused Nepi Rockcastle and EPP.

Intu, which was spun out of SA insurance tycoon Donald Gordon’s Liberty Internatio­nal in 2010, used to be punted as one of the JSE’S prime rand hedge propositio­ns as it owned some of the UK’S most prized retail assets. But that was before Brexit, the growing threat of online shopping and a few failed recapitali­sation attempts sent sentiment crashing. Over the past year, Intu’s market cap tumbled from close to R20bn to a measly R1.7bn.

Though the rapid rise in dividend yields and huge discounts to NAV suggest impending disaster, the flipside is that the sector looks dirt cheap and could offer rewards for investors prepared to wait out the down-cycle. However, investors shouldn’t expect a quick recovery. Garreth Elston, chief investment officer at Reitway Global, says: “We are far from the end of this painful episode and it is too soon to draw conclusion­s about the shape or pace of any recovery. Investors will need to be patient. Volatility is here to stay for a good while.”

The biggest risk facing property investors is that they may not get paid a dividend this year — or the next. A number of property stocks have in recent weeks announced they are postponing dividend payouts to shore up balance sheets. Others have withdrawn

dividend forecasts until later this year.

Anas Madhi, director of Meago Asset Managers, expects most Reits to hold on to their cash as potential losses from lockdown-induced rental holidays, tenant defaults and bankruptci­es start to mount. He says: “Given how poor earnings visibility has become due to the uncertaint­y of the extent of the pandemic and how quickly lockdown restrictio­ns will be eased, strengthen­ing balance sheets will be a priority.”

But most analysts agree that the value propositio­n offered by the property sector is becoming difficult to ignore. Anchor Capital fund manager Glen Baker reckons many Jselisted property companies are fundamenta­lly worth 50%100% more than current share prices. “The share prices are factoring in a far worse scenario than our base case,” he says. “There is a long road ahead but, in our view, in the end we will look back at this as a great opportunit­y to buy property shares.”

The trick, of course, is to try to spot the counters that offer the best recovery upside in a normalised, post-pandemic world.

IM has singled out four smaller property counters that deserve a second glance from patient investors with a higher risk appetite.


Fairvest owns a portfolio of 44 small to mid-sized retail centres worth R3.49bn that cater mostly to lower-income shoppers in rural areas and townships. Flagship assets include Sebokeng Plaza in Vereenigin­g, Bara Precinct in Soweto and Middestad Mall in Bloemfonte­in.

Peter Clark, portfolio manager at Ninety One, says a key attraction of Fairvest’s portfolio is its large exposure to food and grocery retailers. The company’s top three tenants in terms of space occupied are Shoprite Checkers, Pick n Pay and Spar, all of which have continued to trade through the lockdown and are still paying rent, unlike many nonessenti­al retailers.

He says spending at Fairvest’s retail centres will be further supported by the government’s recent increases in social grants to poor households, which represent a large portion of the company’s shoppers. Fairvest boasts a well-managed balance sheet and low loan-to-value (LTV) ratio of 30% (following the recent disposal of Tokai Junction for R190m, which will be used to pay off debt). That compares to a sector average closer to 40%.

Clark says given the smaller nature of Fairvest’s assets, any vacancies that may appear in the coming months are likely to be filled a lot easier than those at larger shopping centres. And the company has almost no exposure to the likes of Edgars, which recently went into business rescue.

He adds: “Management hasn’t ventured offshore or used any elaborate derivative agreements. Rather, it focuses on property fundamenta­ls and on delivering continuing strong operationa­l metrics.”


The only specialist self-storage play on the JSE, Stor-age owns more than 70 facilities spread across SA’S major cities and the UK.

The R6bn portfolio has a 67% exposure to SA and 33% to the UK. The company dominates the SA self-storage space and is becoming a major player in the UK under the Storage King brand.

Keillen Ndlovu, head of listed property funds at Stanlib, believes self-storage is one of the few sectors that will benefit from a post-lockdown recession.

“Many people are likely to battle financiall­y, forcing them to trade down to smaller, cheaper homes. So they will need space to store their

goods,” he says.

The business was started in 2005 by accounting graduates and brothers Gavin and

Stephen Lucas, and varsity friend Steven Horton. The company’s relatively young management team is known for its strong entreprene­urial flair.

“We like Stor-age’s passionate and driven management and the fact they have vested interests in the business,” says Ndlovu.

Since listing on the JSE in November 2015, management has grown the portfolio aggressive­ly from R1.3bn to more than R6bn. The Stor-age portfolio also doesn’t pose concentrat­ion risk as its occupancy base is spread among many tenants, mostly private individual­s. In addition, the company has a low and manageable LTV of 27%. “Low LTVS are key in these tough times,” says



Co-founded five years ago by Cape Town property tycoon Mike Flax, Spear is the JSE’S only pure Western Capefocuse­d property counter. It owns 32 properties worth R4.18bn, with the bulk located in and around Cape Town.

Spear’s portfolio is a mix of retail, office and industrial buildings as well as two hotels — the swanky 15 on Orange in Cape Town’s city centre and Doubletree by Hilton in Woodstock.

Management continues to deliver above-market dividend growth, which has no doubt been buoyed by its specialist knowledge of the Cape property market. This month, the company declared a 6% increase in dividend payouts for the year ending February. That places Spear as one of fewer than a handful of property stocks still able to deliver inflation-beating dividend growth.

CEO Quintin Rossi, like many of his peers, hasn’t provided an earnings growth guidance for the 2021 financial year amid uncertaint­y about the length and strength of the pandemic’s economic fallout.

But Metope Asset Managers investment analyst Kelly Ward remains bullish on the company’s long-term prospects. “Spear’s portfolio is small and focused, which will allow management to be hands-on in tenant negotiatio­ns. We believe the company will be profitable in future,” she says.

Granted, the tourism sector has been one of the hardest hit by the lockdown and is unlikely to see any noticeable uptick in occupancie­s and revenues this year. But hotels represent only 7.5% of Spear’s income.

Ward says rental collection from other tenants has been strong — the collection rate has been 98% and 92% in March and April respective­ly, despite the lockdown.

She adds: “The balance sheet remains defensive and should be able to withstand some valuation writedowns in the short term.”


Though SA Corporate may seem like a wild card given the recent disruption in its executive management and underperfo­rmance in terms of dividend growth in recent years, the company appears ripe for a takeover.

Ridwaan Loonat, property analyst at Nedbank CIB, believes there’s opportunit­y to clean out and simplify SA Corporate’s business by selling stakes in housing play Transcend

and retail-focused Safari, among others.

SA Corporate is diversifie­d among various sectors, including retail at 43% of its asset value (mostly smaller centres in secondary areas), industrial at 28%, rental housing at 23%, offices at 5% and storage at 1%. The company also has a stake in a joint venture that owns two retail centres and one office property in Zambia.

“The stock looks cheap on valuation,” says Loonat. In addition, SA Corporate’s industrial portfolio is relatively defensive and has historical­ly enjoyed a low vacancy profile.

“A large part of this portfolio has also seen its rentals already rebased over the past two years,” he says.

A key risk lies in the company’s exposure to the affordable rental housing market via its stake in the Affordable Housing Co (Afhco), which owns more than 60 residentia­l buildings in downtown Joburg.

“The Afhco business could see vacancies increase if the economy remains weak for a prolonged period post Covid19,” Loonat says.

The Stor-age portfolio also doesn’t pose concentrat­ion risk as its occupancy base is spread among many tenants, mostly private individual­s

 ??  ?? Spear Reit’s portfolio includes two hotels, one of which is 15 on Orange (above) in Cape Town’s city centre.
Spear Reit’s portfolio includes two hotels, one of which is 15 on Orange (above) in Cape Town’s city centre.

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