New plans to enhance financial reporting in listed real estate sector
The corporate governance guidelines are due to be released later in 2019
A new set of corporate governance guidelines is on its way for the JSE’s struggling real estate sector, which in 2018 delivered its worst performance since the formation of the SA Listed Property Index (Sapy) in 2002. This was a result of the scandal around the Resilient group of companies.
Analysts say the real estate investment trust (Reit) sector has to pull up its socks and provide better disclosure as it tries to lure back investors.
With this in mind, the SA Reit Association, which represents all the JSE’s Reits, worth a total of about R330bn, is updating its Best Practice Recommendations (BPR) for the first time since they were introduced in 2016. Reits differ from property developers as they have to pay out 75% of their income as dividends.
Many investors had lost interest in listed property after a massive sell-off in shopping centre owner Resilient and its associated companies in January 2018, which resulted in about R120bn being wiped off their market value. The sell-off was sparked by allegations of market manipulation and insider trading around the companies.
As a result, Resilient, Fortress, Greenbay and Nepi Rockcastle, which had accounted for about 40% of the listed property sector, saw their share prices collapse in the first quarter of 2018. The recovery has been slow and the stocks have been among the worst-performing companies on the JSE. Fortress’s total return in 2018 was -66.5% while Resilient’s was -58.30%, making them the third- and seventh-worst performers on the bourse.
The FTSE/JSE Sapy, which includes the JSE’s top 20 liquid real estate companies by full market capitalisation, achieved a total return of -25.26% in 2018, according to Catalyst Fund Managers.
This return included dividend and share price growth.
SA Reit Association accounting and JSE committee chair Bram Goossens said the new BPR would be released “hopefully by the end of the year”.
The BPR were created by the sector as some of the metrics that Reits are measured by were not strictly governed by international financial reporting standards.
Goossens said the BPR would introduce reporting measures that were derived from financial statements prepared in terms of international financial reporting standards but with certain adjustments.
A large portion of the updated BPR would consider how companies calculate and present their dividends. Dividend per share growth has been used as the primary metric by which many fund managers have compared Reits.
Performance metrics would be included to measure the extent to which dividends are supported by true underlying earnings and not one-off income items.
Chief investment officer at Bridge Fund Managers Ian Anderson said methods used to calculate and account for dividends need to be consistent among Reits, even if it initially has negative effects for some of the companies’ shareholders.
“What has been significant, and negative, for the sector is the need to highlight once-off and nonsustainable profits and to remove those from distributable earnings. This has seen a rebasing of dividends and resulted in more selling pressure across the whole sector,” he said.