EDITORIAL: The pain is not over for listed property
Analyst forecasts dividend growth from the sector to be a paltry 2% over the next year amid continuing adverse conditions
You would be hard-pressed to find anyone who would disagree that 2018 was the listed property sector’s annus horribilis.
After a decade of strong average annual total returns of about 15%, the sector came crashing down with its worst performance in more than two decades in 2018. The FTSE/JSE SA listed property index ended up losing 25.26% based on share price declines and dividends.
While most of this was due to the scandal that engulfed the Resilient stable of companies, which collectively lost more than R100bn in 2018 after a sudden sell-off of shares, a depressed economy and a woeful retail environment also dragged down most of the JSE’s property counters.
While the Financial Sector Conduct Authority has cleared the Resilient stable of allegations of insider trading, other investigations are continuing. Once they are resolved, investor confidence should improve.
Even so, with economic growth sitting at an uninspiring 0.8% for 2018, and retailers delivering disappointing results recently, SA listed property is still in for a bumpy ride, at least in the short to medium term.
Keillen Ndlovu, head of listed property funds at Stanlib, says he is expecting dividend growth from the listed property sector of just 2% over the next year as these challenges continue.
To put that in perspective, an average 6% was still achieved by the sector in 2018. To make matters worse, some stocks are being hurt by the very diversification strategies they had in place to protect them from a weak local economy.
None of these strategies have played out the way they were envisaged
During the bleak Jacob Zuma years corporate SA generally expanded aggressively into offshore markets to mitigate the risk at home. This included listed property companies that poured into Eastern Europe, the UK and other regions to diversify income streams.
At home, others sought to strengthen their position in the office property market by securing government leases, the idea being that having a sovereign tenant was as safe as proverbial houses. They also started investing more heavily in favour of retail property, which was considered to be relatively defensive.
None of these strategies have played out the way they were envisaged. Perhaps Eastern Cape entrepreneur Sisa Ngebulana’s Rebosis Property Fund, which warned the market on Friday that it would be reporting the largest drop in dividend growth in the history of the company for the year to August, is a good example that the road to hell is often paved with good intentions.
Rebosis has been hit by a perfect storm, having diversified by investing in UK mall owner New Frontier Properties some years back, as well as having an office strategy that included having the government as a tenant and beefing up its exposure to local retail property. All of this has come back to bite it hard.
Uncertainty about Brexit has severely affected property values in the UK, while the department of public works has been slow to renew leases, often insisting on shorter-term agreements of a few months to a year, which has put strain upon companies such as Rebosis because they cannot provide lenders and investors with accurate and predictable earnings forecasts.
And the retail environment has been a nightmare. Apart from embattled retailer Edcon, which has been closing stores in malls across the country as it struggles to survive, shopping centre landlords have been forced to agree to lower rentals when leases come up for renewal.
This situation is unlikely to change soon. All there is to do now is for property groups to batten down the hatches and focus on reducing vacancies in the portfolio. It is necessary, while understandably difficult, to reduce rentals to keep tenants, but this seems to be one of the few options available to landlords.
Better to take short-term pain and live to fight another day.