THABO HLANGWANI: Listed property stocks offer pockets of good value

Just as the world shows flickering signs of recovery from the Covid-19 pandemic, the impact of the Russian invasion of Ukraine is a continuing threat to the stability of the global economy.

Though the full effects of Russia’s vicious attempt to subjugate its neighbour have yet to be felt globally, this geopolitical earthquake cannot be ignored. Closer to home, domestic idiosyncrasies compound an already challenging global outlook for investors. Where does this leave the local listed property sector, which was ailing even before the pandemic?

A brief review of the period since 2018 gives us a better sense of listed property’s trajectory. Substantial volatility, share price declines caused by the Resilient group of companies, office and retail oversupply and SA’s struggling economy, together created hesitancy and negative sentiment.

However, by the end of 2020 the inverted arc showed signs of an upward tick. Corporate activity was one of the big themes responsible for this change of tack. Fairvest shareholders voted in favour of the Arrowhead and Fairvest union, and this merger is now complete and Redefine is offering a swap ratio to take Echo Polska Properties internal.

Other drivers of last year’s performance include the improvement of capital structures and the unwinding of unsustainable debt structures, as well as better income visibility and an improved dividend outlook due to lower liquidity and solvency risk.

Surprisingly, the civil unrest in KwaZulu-Natal and Gauteng in July 2021 did not have the expected impact on the sector. This, coupled with better-than-expected macroeconomic data for 2021 enabled many companies to recover their cash flow, improve their operational outlook and return to dividend-paying positions.

These growth enablers have set the foundation for continued recovery during 2022. However, property remains under pressure due to weak macroeconomic fundamentals such as slow global growth, SA’s 2% GDP growth forecast for this year, the ongoing electricity crisis and lingering Covid-19 risk.

Listed property will have to contend with inflation expectations and how this affects rental growth. Rental escalations will continue to be negotiated at or above inflation rates. The risk is that quantum interest rate hikes may derail recovery in the property sector, particularly if the hikes are too aggressive.

Overall, general equity investors will have increased appetite to participate in the sector, with acquisitions and consolidation a growing theme. As sector volatility starts to normalise to historical levels, this resilience will bolster continuing growth.

There are a few additional themes that will impact decision-making for property owners and investors this year. Innovation will be at the centre of property operations as hybrid work models become more widely adopted and the demand for office space remains low.

One indicator of these property trends is the conversion of the old PwC office space in Johannesburg into a 700-apartment development. Another is the phenomenon of Zoom towns emerging, as city dwellers and families are not waiting for retirement to retreat from the hustle and bustle of city-living to smaller, mainly coastal locations.

Sales growth from most SA retailers has been good. In 2021, community shopping centres performed better than those in urban areas. Food was one of the main reasons for this growth, followed by non-discretionary spending on goods such as clothing and electronics. And while the original outlook for the year was negative, this has been rebased for expansion in 2022.

E-Commerce remains the super performer in the retail sector. Takealot’s penetration grew from 2.7% to about 7% in SA during its peak in 2020. Local retailers also saw huge growth in online sales in the same period. For example, Woolworths with 119% growth, Mr Price with 66%, Game with 100%, Makro with 84% and Dis-Chem scoring an incredible 335% increase. Industrial demand will benefit from this growth in the medium to long term.

Our view is that the listed property asset class is diversified from other classes such as bonds, equities and cash. As such, we maintain that it should form part of an investment portfolio.

We continue to allocate to property cautiously, with a preference for specialist property fund managers that can outperform alpha in both upward and downward markets. Listed property has shown the market that it has resilience. Most importantly, the sector has made efforts to correct governance issues and restore balance-sheet strength to remain the most accessible, liquid and cost-effective way to own property.

Sanity is returning to investment markets. Some real estate investment trusts remain underpriced and offer an excellent value for investors. But it remains advisable to stock-pick listed property rather than “bet the farm” on the sector.

Hlangwani is manager research analyst at Absa Multi Management.