Why township malls outperform their suburban counterparts
Malls that cater for lower-income shoppers are delivering better returns than their suburban counterparts
Real estate investors may well be tempted to stash their cash elsewhere in light of the disappointing income and share price performances delivered by JSE-listed property stocks this year.
Few SA-based real estate investment trusts (Reits) have bucked the general trend. Fairvest Property Holdings is a notable exception.
The company, which owns a R3bn portfolio of more than 40 retail centres that cater mostly for lower-income shoppers in townships and rural areas, last week reported dividend growth just short of 10% for the year to the end of June. That’s impressive in a recessionary climate, and nearly double the average 5.5% rise in dividend payouts expected from the sector as a whole this year.
Moreover, Fairvest continues to shine on the capital growth front, notching up a share price gain of about 20% in the year to date versus the SA listed property index’s drop of 23% over the same time.
"Fairvest’s distribution growth of 9.9% was perhaps the silver lining in what has been a pretty cloudy results season. Overall, Fairvest’s was a great result, with no one-off earnings," says Kundayi Munzara, director and portfolio manager at Sesfikile Capital.
He says it is particularly impressive that Fairvest’s portfolio achieved like-on-like net income growth of 11.7%. It was driven by rental hikes of about 7%, new lettings that pushed vacancies down from close to 5% to a low of 3.5% in the year to June, and improved cost recovery. Munzara says these numbers are indicative of management "sweating the assets".
He believes other smaller property stocks could take a leaf out of Fairvest’s book: "The company compensates for lower liquidity and diversity by delivering sector-beating results, and its management team has a deep understanding of the portfolio, with a business plan for each property."
Though the loan-to-value ratio of a relatively low 25% poses an opportunity for Fairvest to acquire more assets without tapping the capital markets, Munzara says the low level of debt that is fixed is a concern.
"Only 46% of Fairvest’s debt is fixed, versus the sector average of more than 70%. The risk of limited hedging is that earnings could be [lowered] should local interest rates and funding costs rise," he notes.
The question for investors who haven’t yet bought Fairvest shares is whether they have missed the boat. It doesn’t appear so. Ian Anderson, chief investment officer at Bridge Fund Managers, says Fairvest has been one of the fund’s preferred holdings for quite some time and remains an attractive buy at current levels of about 230c a share, given the company’s above-market growth prospects over the next two to three years.
Despite Fairvest being the top-performing SA Reit over five and 10 years in terms of total returns, Anderson says it surprisingly still trades at a discount to its NAV.
He ascribes that to its relatively small size, which means the company tends to attract few institutional investors.
"Double-digit growth in net property income is what sets Fairvest apart from its peer group. The company’s focus on low-income mass-market retail in a sector where disposable income is supported by social welfare grants has clearly paid dividends," says Anderson.
He adds that management has delivered on its growth promises year in and year out, without the market taking much notice. "But I think a few more investors will look at Fairvest following last week’s results announcement, particularly on the back of disappointing outlook statements from Growthpoint, Hyprop and the Resilient group over the past few weeks."
Kelly Ward, investment analyst at Metope Investment Managers, has a similar view.
"Fairvest now trades at a forward yield of 9.9%, which we believe to offer good value in the current market."
Ward says Fairvest’s pleasing set of results comes at what is clearly a very trying time for SA consumers because of rapidly rising living costs, including recent VAT and fuel price hikes, in a contracting economy. Even more encouraging, she says, is that Fairvest has forecast dividend growth of a further 8%-10% for the year ending June 2019 when many local counters are offering investors growth in line with inflation at best.
"We believe there is more pressure to come for the consumer, and very few green shoots given SA’s recent GDP numbers and forecasts," says Ward.
At the results presentation last week, Fairvest CEO Darren Wilder said he believes the company’s competitive advantage is that it is a simple business with a specific focus. "We let our space and we collect rentals. We don’t pay any fees or one-off profits as part of our distributions, so we don’t have to reset our base as some other companies are doing these days."
Wilder stressed that management doesn’t intend to change its investment strategy. "Our focus will remain on retail properties that cater for the lower LSM market.
"And we are not going offshore or into the rest of Africa."
Referring to Fairvest’s target market, Wilder said there’s no doubt that lower-income shoppers are more resilient in an economic downturn than middle-and higher-income consumers. "Our malls cater mostly for daily shoppers who typically spend R80 a visit on a basket of food.
"They have very little debt, are often recipients of social grants and don’t have to pay for housing, electricity or water.
"[Their] disposable income as a percentage of total earnings is much higher than that of middle-and higher-income households, which are now under pressure."