2018 will deliver the worst returns for listed property investors in more than 20 years if there is not a miraculous recovery in the next two months. Picture: ISTOCK
2018 will deliver the worst returns for listed property investors in more than 20 years if there is not a miraculous recovery in the next two months. Picture: ISTOCK

The fallout from the Resilient scandal, coupled with worse-than-expected earnings growth for the June reporting period, continues to plague the listed property sector.  In 2018 it is realising negative returns for the first time since the 2008 global financial crisis.

In fact, 2018 will deliver the worst returns for listed property investors in more than 20 years if there is not a miraculous recovery in the next two months.

The share prices of the 20 largest property stocks are down 28% year to date thanks to a selloff in the Resilient stable of companies as well as reduced investor appetite for listed property generally. The total return on these stocks is only improved slightly when dividend growth is included.

The FTSE/JSE SA Listed Property Index (Sapy), which includes the top 20 liquid real estate companies by full market capitalisation with a primary listing on the JSE, is down close to 23%  in the year to date in terms of total capital and income returns.

The Financial Sector Conduct Authority (FSCA) has been investigating allegations against the four companies since March, studying trades around the shares and reporting about the companies. It has given no indication of when it will release its results.

The South African All Property Index (All Prop), which includes all listed real estate companies on the JSE irrespective of whether they have a primary or secondary listing, has lost 20% in terms of total returns.

Keillen Ndlovu, the head of listed property funds at Stanlib, says 2018 has been an unprecedentedly bad year for listed property. "The sector being down about 23% so far this year is the worst return we have seen since 1995 and since the launch of the Sapy in 2002. The previous lowest return was a negative 16% in 1996 but we do not really focus on this as our markets were still very young then and going through a transition and listed property was not recognised as an asset class," he says.  

The last time the Sapy suffered a negative return was during the subprime crisis in 2008, when the sector lost about 4.47%, he says.

The falls in the Sapy and All Prop were triggered by allegations of insider trading and share price manipulation against the Resilient stable of companies, which includes Resilient, Fortress, Greenbay and Nepi Rockcastle. In recent years, the stable of companies outperformed many other property counters in SA in terms of capital and income growth. A number of hedge funds shorted shares in the four companies.

In January, the total market capitalisation of these four companies accounted for 40% of the total listed property sector, which had been worth around R800bn at the time.

The Financial Sector Conduct Authority (FSCA) has been investigating allegations against the four companies since March, studying trades around the shares and reporting about the companies. It has given no indication of when it will release its results.

There has also been weakness across the listed sector in general, owing to a lack of economic growth, poor business confidence and weak consumer spending, which means that property funds have seen their earnings come under pressure. 

Garreth Elston, a portfolio manager at Reitway Global, said listed property had undergone a correction because many of the stocks were overvalued and the total negative return of the sector should be considered within this context. 

 Elston said any recovery was likely to be slow. “I believe that 2018 has reset the SA property sector, popping a bubble that was driven by irrational views on growth and a fundamental mis-pricing of risk. At the moment, it is highly unlikely that the sector would see a 25% plus return in 2019," he said.

"That is not to say that it’s impossible, as the sector has seen recoveries of over 30% before — for example from the fourth quarter of 2008 to the fourth quarter of 2009. Any real recovery would be predicated on real, sustainable growth occurring in SA, but adding in 2019 as an election year, and a sharp recovery seems quite distant at the moment,” he said.

Anchor Stockbrokers’s head of research, Craig Smith, agreed that a slow recovery could start in 2019, buoyed by some momentum in the economy.

“Business and investment confidence need to improve; politics will certainly influence this, especially in the run-up to the election. If President [Cyril] Ramaphosa instils confidence and policy certainty and encourages the private sector to invest in SA on a more meaningful scale, then this will be good for property. Furthermore, performance of offshore markets, specifically in central and eastern Europe and Australia, will play a role,” he said.

Elston said many listed property stocks could be more attractive investments than companies in other sectors.

“Prices in the sector are currently at far more realistic levels that more accurately reflect market realities, and patient investors who can buy and hold for at least a three- to five-year period could be well rewarded for investing the sector. But it is most likely not a market that is going to see a super-recovery, but rather a gradual, measured one as the economy starts to recover,” he said.

Smith said  there were a number of listed property funds which still held value partly because they had made good deals abroad. These included Growthpoint Properties,  Redefine Properties and even Resilient.

He said that notwithstanding the investigations under way,  the Resilient group had been “masterful” by choosing to invest in central and eastern Europe some 11 years ago before their peers.

andersona@businesslive.co.za