Investors showing little appetite for listed property shares
The slump in listed property prices has pushed dividend yields to 10-year highs, but investors are not convinced of value
When are income chasers likely to start buying property stocks again?
That’s the million-dollar question on many people’s minds as the negative sentiment that has led to the sector’s unprecedented 23% decline (in total return) in the year to date lingers. The slump compares with a 17% total return achieved by the SA listed property index (Sapy) last year, and is the sector’s worst performance in more than 20 years.
There have been only three other periods since 1995 when property stocks delivered a negative return: 1996, 1998 and 2008. But these declines were not nearly as severe as that of this year, which ranged from a 1% drop to a 16% fall.
This year’s share price decline was initially triggered by a sell-off of the Resilient stable of shares in January and February following allegations of insider trading and share manipulation. The matter is the subject of a protracted and as yet unresolved probe by the Financial Sector Conduct Authority (FSCA).
While the four companies associated with the Resilient group — Fortress Reit, Resilient Reit, Greenbay Properties and Nepi Rockcastle — have led the sector’s decline, with share prices slumping between 40% and 64% this year at the time of writing, a number of other real estate stocks have also been sold down in recent months. These include rand hedge plays such as MAS Real Estate, Tradehold, Hammerson and Intu Properties, as well as SA-focused Rebosis Property Fund, Texton Property Fund and Balwin Properties.
Share price weakness has pushed the Sapy’s forward dividend yield to close to 10%, a level last seen during the 2009 recession.
That means that property stocks are now the cheapest they have been in a decade. In fact, as many as 42 out of the sector’s 50-odd counters are trading at a discount to NAV — some of more than 40%, for example Hammerson, Capital & Regional, Tradehold, Rebosis, Texton, Transcend, Accelerate Property Fund, Delta Property Fund and Hospitality (B).
So why aren’t value investors climbing back in? Analysts say it is difficult to predict when appetite for property stocks is likely to recover, considering how many concerns now weigh on investor confidence. These include ongoing political and economic uncertainty, the land expropriation issue and the lower-than-expected earnings growth that was declared by a number of property companies for the June-July-August reporting periods on the back of higher vacancies and softer rentals.
The latest figures from Catalyst Fund Managers show that dividend growth among property stocks has slowed to an average 8.8% in 2018, down from 12%-15% a year in the preceding three years.
Catalyst Fund Managers investment analyst Imdaad Nana says downward revisions of growth expectations have continued during the recent reporting period due to the recessionary economic climate, which has curtailed consumer spending and business expansion.
"In addition, the repercussions of distributing nonrecurring, unsustainable income in prior periods have become unavoidable," he writes in Catalyst’s latest monthly property review. He is referring to the trend among property companies to boost dividend payouts by adding one-off fees or trading profits to distributable rental income, which is now forcing many to rebase their earnings downwards.
Keillen Ndlovu, head of listed property at Stanlib, cites the potential failure of Edcon as another concern for property investors, considering the exposure that SA-focused real estate stocks have to the retail sector.
About 53% of the sector’s assets consist of shopping centres and other retail properties, which far outweighs the ratio of offices and industrial buildings. "A clearer strategy on Edcon’s proposed store closures will help improve sentiment," he says.
So too will clarity about the land expropriation debate. Also, Ndlovu says the eagerly awaited conclusion of the FSCA’s investigation of allegations about the Resilient group will help restore investor confidence, though it is anyone’s guess when this will happen.
Ndlovu expects a "modest" recovery in property share prices over the next 12 months. "But total returns will be driven by income as opposed to capital growth. We are expecting 5%-6% distribution growth over the next year, which will result in an average forward dividend yield for the sector of more than 9.5%."
Craig Smith, head of research at Anchor Stockbrokers, says the current volatility in property share prices makes it tricky to come up with a one-year total return forecast for the sector as a whole.
Smith expects property punters to continue to be cautious in their capital allocations, as a host of global factors, in addition to SA-centric concerns, are weighing on confidence. These include the threat of trade wars, rising interest rates and an upswing in commodity prices.
However, Smith still expects listed property to deliver a total return of 12%-14% a year on average over the next five years.
That may be lower than the average 18% a year achieved by the sector over the past 15 years (ending in June), but Smith believes this is a realistic and acceptable return for listed property.
"Listed property is a hybrid between an equity and a bond, and therefore investors should be comfortable with a return profile lower than equities but higher than bonds," he says.
While sentiment towards real estate stocks may not recover overnight, Smith says investors should keep in mind that listed property is a separate asset class providing much-needed diversification.
"The income-generating ability of listed property is still far more predictable than most equity stocks, and therefore we believe there is certainly a place for listed property in a balanced portfolio."