Listed property takes a battering
Listed property experienced a rough ride in 2018 with average share prices losing more than 25% and investors are cautioned to carefully assess the risks as the volatility is likely to continue.
The asset class delivered a negative return of 25.2% for the 12 months ending in December 2018. This affected the three-year return, with investors losing 1.1% over this period compared to gains of 11.7% for the three years to end-December 2017, says Eugene Visagie, portfolio specialist at Morningstar Investment Management.
Prior to 2018, he says, the property sector beat all other local asset classes, but the impact of stock-specific declines last year combined with a low-growth environment resulted in listed property experiencing its worst calendar year return since the inception of the South African property index (Sapi) in 1993.
Some of the company-specific issues include the Viceroy allegations about the Resilient group of companies, which prior to their collapse comprised more than 40% of the Sapi. The more recent rumours around Nepi Rockcastle (also part of the Resilient group of companies) and a potential takeover bid for Intu Properties falling through resulted in the stock losing more than 45% in November alone, according to Visagie.
Despite the negativity, the South African real estate investment trust (Reit) sector believes it will deliver double-digit returns for investors in 2019.
Anchor Stockbrokers real estate analyst Wynand Smit expects listed property to deliver a total return, made up of share price movement plus distributions, of roughly 13% to 14% over the long term, and marginally lower than this in 2019 unless SA's economic and political outlook improves substantially.
Investors know with reasonable certainty what to expect from an investment in the Reit sector in 2019 because South African Reits have relatively predictable incomes, says Andrea Taverna-Turisan, South African Reit marketing committee chair.
What is a Reit?
A real estate investment trust (Reit) is a type of listed company that owns, finances and often operates an income-producing portfolio of properties or property-owning entities. To invest in a Reit, you buy their shares. The benefit of Reits for shareholders is that they offer a mechanism through which you can invest in the physical property market without laying out significant amounts of money and having to manage the properties.
Reits are generally managed by competent, well-qualified teams. The entry cost for a Reit investment is the price of a single share. Investors can buy or sell shares in Reits at any time, without the costs and delays involved with physical property ownership, as well as benefit from exposure to a pool of properties rather than a single property.
When you invest in a Reit, your investment return is paid to you in the form of a distribution (dividend), which is derived from the rental income the Reit receives from its properties and any property development profits less property-related expenses, finance costs and administrative expenses. JSE-listed Reits must pay at least 75% of their distributable income to investors each year but most companies declare 100%.
"SA's Reits are exposed to the best commercial properties in SA, and, in some instances, offshore. Their property income is underpinned by lease agreements with tenants in these assets. Rentals are contracted and most escalate at a predetermined rate annually - around 6.5% to 8% in the current domestic market," he explains.
Catalyst Fund Managers' Mvula Seroto expects positive total returns from the Reit sector largely driven by current forward income yields (expected distributions divided by the current share price) and capital returns (growth in the share price) based on growth in income.
But Morningstar is circumspect about future prospects for the listed property sector.
Visagie says it has experienced an extremely volatile period which could continue until the Resilient group of companies shows signs of stability.
Though overall valuations (price/net asset value as well as on a yield-relative basis compared to South African bonds and equities) look very attractive, distribution growth expectations have been scaled back due to subdued domestic conditions, rising vacancies and an oversupply of space, especially in specific nodes in the office and retail sector.
The listed property sector can be broken down into three broad categories:
- The Resilient group of companies (Resilient, Lighthouse (previously Greenbay), Nepi Rockcastle, and Fortress A and B), which has as at end-December 2018 equated to roughly 24% of the all property index (JSE-Alpi), the new, broader property index introduced last year;
- The South African-focused property shares, including heavyweights Growthpoint and Redefine Properties, which generate most of their income in SA and rely on local economic growth. These shares made up about half the Alpi as at end-December 2018; and
- Foreign-listed counters including Intu, Hammerson and Capital & Counties. These shares are merely listed in SA, with their operations and properties elsewhere in the world. As at end-December, the foreign listed counters equated to about 30% of the Alpi.
In addition, each distinct part of the listed property space faces its own unique risks, Visagie says. These include:
- Resilient group: an investigation into the group and its valuation methodology;
- Locally focused stocks: low-growth environment in the South African market combined with uncertainty created by land expropriation; and
- Offshore listed stocks: aside from the volatile rand affecting the return profile of these counters, global property markets are facing uncertainty because of Brexit, rising interest rates (especially in the US), as well as a rise in online shopping.