EDITORIAL: Listed property sector’s loss of credibility
Analysts say the sector is about 15% overvalued while funds try to keep debt down
SA’s listed property sector is drowning in a sea of problems. The latest facing the R470bn sector is a loss of credibility, particularly about how listed funds value their properties.
One bank says the consensus among analysts is that the sector is about 15% overvalued, while many funds are trying to keep debt levels as measured by their loan to value (LTV) at below 40%. This suggests a fund with a LTV of 40% actually has a LTV of at least 50%.
Investors are rightly arguing that landlords and property fund CEOs need to revalue their assets in light of the weak economic conditions in SA and globally, especially in countries such as Poland and Romania.
The sector is on course to post its biggest one-year decline, surpassing more than 25% losses in 2018
As much as 45% of the listed property sector is exposed to offshore countries, and at least a third includes eastern European assets. While eastern European countries have experienced strong economic growth over the past decade and had started 2020 well, their progress has been wrecked by the Covid-19 pandemic.
Global property services group JLL, Joshua Askew, a valuation expert, and Pepler Sandri, senior associate, told Business Day that unit prices are being inflated by artificially high valuations of trust’s assets.
“This explains the current lack of appetite among investors who are questioning the basis on which the underlying real estate assets are being valued,” says Askew.
True, some properties are more overvalued than others, but on the whole the values of listed funds’ assets are way out of kilter compared with other markets in the world. And chances are the current valuations do not accurately reflect economic and market realities, especially for funds with big exposure to SA.
SA’s economy, which has hardly grown in the past 10 years, has slipped into its second recession in two years and there is consensus that the coronavirus-induced global downturn will be deeper than the 2008 global financial crisis.
With business confidence at its lowest in decades and consumers battling job losses and the lowest wage growth on record, there are more office and retail properties to rent than there are tenants.
Companies such as Sasol and Discovery have vacated smaller offices and consolidated into single, large offices while weak consumer spending has forced smaller boutique retailers to vacate shopping malls.
As a consequence, rents have been contracting and there are shrinking escalation rates, which are annual percentage increases of rents. A virtual shutdown of economic activity to contain the rapid spread of the Covid-19 pandemic will worsen this situation.
Last week the FTSE/JSE SA listed property sector index (Sapi) suffered its worst day in history when it fell by more than 16%, pushing it down more than 50% year-to-date, including dividends and capital returns.
The sector is on course to post its biggest one-year decline, surpassing more than 25% losses in 2018. The sector did manage to achieve a total positive return of 1.93% in 2019, but while it was pleasing it conserved values, the growth was not inspiring.
There has also been an exit of listed capital to Europe, Australia and the UK.
So, it is odd that valuers are still applying yields of 7% or less across their portfolios in the market where tenants are hard to come by, and if they are found, they are in a stronger position to demand lower rentals.
The discord between published and market values needs to be broken. To do this, listed funds should have their properties valued every year instead of every three years, which tends to be the common practice.
The JSE and other regulatory bodies should embrace global best practice.
The exchange regulator can put in place a requirement for valuer rotation every five-seven years for all real-estate-investment-trust-owned assets to prevent relationships with companies from getting too cosy.
In a sector facing weak demand, falling retails and tanking share prices, up-to-date information on the value of underlying assets is crucial in any investor’s toolkit.