Listed property: dude, where’s my dividend?

The listed property sector has given income-chasers little to cheer about in the latest reporting season.

Dividend (or distribution) growth — the metric that arguably matters most to property investors — has generally disappointed as higher vacancies and lower rentals in retail, office and industrial portfolios start to erode earnings and property valuations.

In fact, some companies — most notably former market darling Hyprop Investments — have now reported their first drop in dividends. The owner of Rosebank Mall in Johannesburg, Clearwater Mall on the West Rand and Canal Walk in Cape Town saw payouts for the year to June 30 slide by 1.5% — mostly due to impairments on the malls it owns in Ghana, Nigeria and Zambia. The market was expecting growth of 2%. And worse is still to come. Hyprop has warned that dividends will drop by between 10% and 13% for financial 2020. It’s hoping for a return to higher dividends in 2021, once it has sold its African investments and repositioned its SA and Eastern European mall portfolios.

Similarly, SA Corporate Real Estate, which has been embroiled in a prolonged boardroom battle, also reported below-guidance dividend numbers for the six months to June: down 6%, versus its earlier forecast of flat growth.

Sector heavyweight Growthpoint Properties last week declared dividend growth of a fairly decent 4.6% for the year to end-June, in line with expectations. The performance was propped up by its offshore interests in Australia, Poland and Romania. But management dashed any hopes of the company repeating inflation-linked dividend growth next year. "Growth, if any, for 2020 is expected to be nominal," said group CEO Norbert Sasse. "The SA business climate remains tough and is getting incrementally tougher still. We don’t see a catalyst for a turnaround anytime soon."

Unfortunately for Growthpoint, 70% of its R139.4bn in assets are still SA-based, and its offshore exposure is not enough to compensate for a lifeless local economy.

In fact, SA’s most-visited tourist destination, the R19.2bn V&A Waterfront in Cape Town, was Growthpoint’s only SA asset that showed strong tenant demand and rental growth. Rental renewals came in at 5.2% and 3.7% higher respectively for office and retail space in the precinct.

Other SA-focused property companies that managed to declare solid results for the June financial period are Waterfall developer Attacq and retail-focused Fairvest, whose malls cater mainly to lower-income shoppers. Rand hedge counters, particularly those exposed to high-growth Eastern European markets — such as Nepi Rockcastle, EPP and MAS — are also still delivering the goods.

However, the fact that a number of companies have either missed their dividend guidance or downgraded their growth outlook has prompted analysts to revise their 12-month forecasts downwards. Keillen Ndlovu, head of listed property funds at Stanlib, says dividends are likely to grow no more than 1% over the next year. This compares with last year’s average of 5%, and is significantly below the 9%-12% a year achieved by the sector in the preceding four years. Before June results were announced in August/September, Ndlovu still expected average growth to clock in at 2%-3%.

He ascribes the dimmer outlook primarily to SA’s stalling economy, which has curbed SA Inc and retailers’ appetite to expand their businesses (and thus the premises they rent from listed property owners). "Edcon’s 41% rent reductions and store closures also impacted the numbers," Ndlovu says.

The struggling fashion retailer, which embarked on a restructuring exercise earlier this year in a bid to stay afloat, has traditionally been one of the listed property sector’s biggest tenants.

Given the uncertain economic outlook, landlords have had to focus on tenant retention, which has come at a cost in the form of lower income and dividend growth. "It’s better to keep a tenant in this environment at a lower rental than to lose it,"’ Ndlovu says.

Anchor Stockbrokers real estate analyst Pranita Daya also expects dividend growth to slow to an average of 0%-2% for the next 12 months. "Property returns are likely to remain under pressure until the economy starts showing meaningful growth and business confidence levels improve," she says.

Even though both Ndlovu and Daya expect a recovery in dividends in 2021, investors probably need to brace for a period of "lower growth for longer" as SA property companies start looking at introducing reduced payout ratios. Ndlovu explains: "SA real estate investment trusts typically pay out 100% of their earnings to investors as dividends or distributions. However, globally payout ratios range from 75%-90% and retained earnings are used to fund a portion of operations or service interest costs. Local property companies may start to follow suit, which would lead to already declining distribution growth falling further in the short term."

Daya cites the sector’s increased focus on reducing loan-to-value ratios as another factor that could impact dividend growth. She says many property companies are now keen to dispose of noncore properties to reduce gearing levels and strengthen balance sheets. "This, combined with the potential introduction of payout ratios, means dividend growth will be lower than it has been historically for the foreseeable future."

But it’s not necessarily all doom and gloom for property investors. Companies that successfully restructure their balance sheets in the downturn and use retained earnings to carry out value-enhancing improvements to their buildings will benefit from higher income growth when the economy turns.

In addition, renewed pressure on listed property prices in recent months means the sector now offers a cheap entry point for new investors. Property stocks are trading at historically high dividend yields, with some companies offering 12% or more — not shabby considering cash in the bank is currently giving you 6%-8% at most.