Joan Muller Property writer & columnist
Picture: 123RF/alicephoto
Picture: 123RF/alicephoto

The “demise of the divvy” is what investors in JSE-listed property stocks will best remember of 2020 – besides, of course, the arrival of Covid-19. It put paid to the widely held notion that investing in property provides a predictable and growing income stream.

True, most real estate investment trusts (Reits) will probably resume dividend payouts within the next six to 12 months, when they have more certainty about the direction of rentals, vacancies and arrears in their retail, office and industrial buildings.

JSE rules (which are under review) require that at least 75% of a Reit’s distributable profits are paid out within six months of its year-end to retain Reit status. But that offers little comfort to retirees and others reliant on income who have been hit by a massive double whammy this year: not only have most property stocks slashed or postponed dividends, share prices have also tumbled.

Monday’s property note from Anchor Stockbrokers tells a grim tale: the SA listed property index (Sapy) has tumbled nearly 50% year to date. That brings the Sapy’s total capital losses over the past three years to a whopping 65%, and it means the sector is now trading at an average discount of 50% to its NAV — far below its historic five-year premium to NAV of 1.73%.

Over the past year alone, close to R250bn has been wiped off the value of the JSE’s 50-odd real estate stocks. Many are now a shadow of their former self. Anchor’s report shows that nearly two-thirds of the sector’s constituents are now worth less than R5bn. Three years ago that would have been regarded as “small cap” and hardly worthy of most institutional investors’ time and money.

But even the heavyweights have been decimated. For instance, over the past 12 months Eastern European mall owner Nepi Rockcastle — the sector’s largest counter — saw its market cap shrink from R79bn to R42bn, while SA-based Growthpoint fell from R69bn to R37bn. Redefine was even worse, plunging from R46bn to R14bn. UK mall owners’ fall from grace was more pronounced — most notably that of recently suspended Intu and Hammerson.

The central question is what happens now for the beleaguered listed property sector.

In Catalyst Fund Managers’ latest quarterly update on the SA listed property sector, portfolio manager Mvula Seroto forecasts that funds available for distribution (the income from which Reits dish out dividends) are likely to drop by 36.5% over the next 12-month rolling period.

“This is driven by the impact of Covid-19 on operations — rental concessions being negotiated, increasing vacancies, high tenant incentives and letting commissions; as well as oversupply across subsectors resulting in negative reversions on renewals,” he says.

Seroto also refers to the new trend among property companies to lower their payout ratios in an attempt to shore up their cash reserves: “Distributions and payout policies are currently being reviewed by most management teams and we anticipate that the historical payout ratio of 100% will be revised lower in line with global norms.”

Wanted: reliable investment income

Lower payout ratios could further dent the attractiveness of JSE-listed property as an asset class. But it’s not only local property punters who are struggling to find better alternatives. The imperative to find a high, and growing, income stream is occupying investors’ minds globally.

US investment analysts, for one, believe a Covid-induced rethinking of income investments is now necessary. This interesting article says: “With rock-bottom interest rates unlikely to rise anytime soon and some stalwart companies cutting dividends, being an income-oriented investor has become that much more challenging.”

James West, CEO of Principal Street Partners, says that with the US 10-year treasury note giving investors a return of less than 1% (and unlikely to rise anytime soon), the role of bonds as a way to generate income is “all but gone”.

However, replacing bonds with general equity and real estate stocks is not necessarily a viable alternative, given how many of the sectors that have traditionally been high dividend payers have been wiped out by the pandemic. West says this is forcing analysts to rethink the traditional metrics used to analyse companies.

Robert Wyrick, managing partner at Post Oak Private Wealth Advisors, echoes a similar sentiment in the report. He says investors can no longer look only at specific sectors when picking stocks that pay dividends, as so many of the traditional favourites — such as real estate, energy and industrials — have become the least-attractive options from a stability and growth standpoint.

Instead, investors should focus on companies that are exposed to high-growth industries: technology, communication services and health care, for example.

Wyrick says his focus has shifted to companies with strong balance sheets, which are reinvesting profits into growing their business, rather than those trying to lure investors with the highest possible dividends.

“The highest payers usually end up being the weakest companies in terms of balance sheets,” he says.

While SA investors may well still be getting a decent fixed interest rate of 9.3% on 10-year government bonds, the bottom line is that they will have to start focusing on total returns, rather than relying on dividend income only.

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