Bruised property sector aims to improve internal regulation
The SA Reit Association has made suggestions about how to define key metrics to avoid abusive financial reporting
The SA Reit Association has released a new set of best-practice recommendations, as it tries to improve the reputation of the listed property sector.
In 2018 the sector had its worst year in more than two decades following a number of allegations against a JSE property heavyweight, the Resilient group of companies.
The association, which represents more than 20 JSE-listed real estate investment trusts (Reits), says the guidelines will be the accepted standard for reporting key metrics and are intended to make the analysis and comparison of different Reits easier. This would prevent people from inflating dividend growth to unsustainable levels, as well as underreporting the debt levels on property companies’ balance sheets.
Bram Goossens, chair of the tax and JSE committee of the association, said that since the Reit tax dispensation was still relatively new in SA, having only been introduced in 2013, it was natural that it would take time to establish internal governance measures.
The draft document, published on Monday for public comment, clarifies how metrics used to rate property companies’ performances and financial health should be defined. Goossens said the three most important metrics are dividend per share, net asset value (NAV) and loan to value.
“There has been a loss of trust in corporate SA across a number of sectors. The time was right to make a strong statement with respect to self-regulation,” said Goossens.
There was a large selloff in 2018 in the stocks of Resilient Reit and its associates at the time, Fortress Reit, Nepi Rockcastle and Lighthouse Capital, after the companies were accused of inflating profits through related-party deals.
The Financial Sector Conduct Authority launched an investigation and found that no insider trading occurred at the Resilient stable, but it is still investigating allegations of market manipulation by the companies.
The property sector, which includes Reits as well as developers, ended up being the worst-performing asset class on the JSE last year, with a total loss of 25.26% including dividends and capital growth.
A number of fund managers have welcomed the SA Reit’s recommendations. “The changes will assist local and international investors through increased transparency and improved like-for-like comparisons,” said Garreth Elston, a portfolio manager at Reitway Global.
Ahmed Motara, a portfolio manager at Stanlib, said the “supplemental performance measures being considered will assist investors in understanding key Reit metrics on a like-for-like basis. With the current market focus on loan-to-value, we believe the addition of a metric that assesses ‘look-through’ loan-to-value will be viewed as a welcome addition by investors, as will metrics that aim to standardise cost-income ratios, NAV and distributable earnings calculations.”