Nick Riley. Picture: FINANCIAL TIMES
Nick Riley. Picture: FINANCIAL TIMES

Listed real estate funds may have to pay lower dividends if poor economic growth continues over the next three to five years, says Investec Property Fund CEO Nick Riley.

Listed property has been on a relatively consistent run over the past few years, but the sector is facing challenges and landlords have warned that fund managers need to temper their dividend growth expectations.

The FTSE/JSE South African listed property index, which contains 20 of the best property stocks, managed a total return including capital and dividend growth of 17.2% in 2017; 10.2% in 2016; 8% in 2015; 26.6% in 2014; 8.4% in 2013; and 35.9% in 2012.

So far in 2018 it has lost about 24% in rand terms, partly because of weakness in the Resilient stable of companies, which makes up close to a quarter of the index, as well as a weak consumer environment and rising bond yields.

Head of listed property funds at Stanlib Keillen Ndlovu said the performance of the property sector generally tracked bonds. And with bond yields rising, property share prices were coming under pressure.

Riley said Investec Property Fund had shifted from an acquisition focus to making its current portfolio generate better returns. "These are very tough times for property. We have taken a measured approach to acquisitions and this is even more important now. The unbelievable five years the property sector went through are over."

Len van Niekerk, a principal in corporate finance at Nedbank CIB, said years of weak economic growth had caught up with the property sector and rental growth had slowed between 6% and 7%. However, it could take time before dividend growth slowed across the board.

"I don’t think negative growth will become the norm. There will be a few, certainly not most property groups, which suffer from it. Overall, property companies are still underpinned by leases with annual contractual escalation rates and the flip side of the weaker rand is that some rand hedge stocks are expected to continue producing good distribution growth in euro, boosted by rand weakness," he said.