FINANCIAL MAIL – Choose more carefully now
LISTED property investors have been on a roller coaster in recent weeks, with a number of stocks dipping by more than 10% in May alone. Share price weakness has continued into June.
The sell-down in property stocks has not been entirely unexpected, given the sharp rally in the preceding 12 months — the SA Listed Property index (Sapy) notched up a total return (income and capital growth) of 38% for the 12 months ending April, comfortably ahead of the Alsi’s 18% over the same time. Property counters, particularly the larger, more liquid counters, have been boosted in recent months by, among others, the inclusion in global real estate indices.
However, analysts have in recent months repeatedly warned that the sector is looking expensive, particularly compared to bonds. In a report released earlier this month, Sesfikile Capital director Evan Jankelowitz says it is time for exuberance to be replaced by caution.
“The yield premium at which listed property was trading vs that of bonds at the end of May — 6,5% against 7,95% — was not entirely justified. We believe that the second half of the year will result in global yields pushing higher and a knee-jerk reaction to all income-bearing instruments.”
Jankelowitz expects continued short-term pressure on property share prices, which he says will create cheaper entry points into the sector over the coming months. Others voice a similar sentiment, cautioning investors to become pickier about stock selection as the performance of individual counters becomes increasingly divergent.
This is already evident from latest figures released by Catalyst Fund Managers. They show that the total return difference between the best (Fortress B with 57%) and worst (Freedom Property Fund with -47,5%) performing property stocks among the sector’s 40-odd counters
is more than 100% for the year to date (January-May). That compares to an average 7% total return for the R425bn sector as a whole over the same five-month period (see table).
Most analysts still expect property stocks to deliver an average total return of 8%-12% over the next 12 months. Until now, the performance of individual counters has been driven to a large extent by dividend growth numbers. For the year to date, most property companies have declared better-than-expected results, with a number of counters growing dividends by more than 10%.
However, Grindrod Asset Management chief investment officer Ian Anderson says double- digit dividend growth will become increasingly scarce in the future. “Companies that are being priced to deliver those levels consistently through time are likely to come under tremendous pressure in the months ahead. Especially if both the US Federal Reserve and the SA Reserve Bank start raising interest rates in the second half of the year and Eskom is unable to resolve its electricity supply problems.”
As a result, Grindrod now favours property companies that offer high initial income (or dividend) yields, albeit with slightly more modest longer term growth expectations. Anderson’s top value picks are Delta Property Fund (offices with government as tenants), trading at an attractive 10,8% forward yield, office-focused Texton Property Fund, which offers a 9,8% forward yield, and Western Cape-biased small cap Tower Property Fund, which investors can buy at a 9,7% forward yield.
Anderson points out that none of these companies has been included in global indices yet, so their share prices haven’t benefited from increased offshore demand in recent months like those of many larger counters.
“All three companies offer significant growth through redevelopment and acquisition opportunities, despite the deteriorating economic backdrop and rising cost of capital.”
Nesi Chetty, head of property at Momentum Asset Management, singles out blue chip mall owner Hyprop Investments, New Europe Property Investments (Nepi) and Emira Property Fund as his top three picks.
He says Hyprop has a quality portfolio of tier-one shopping centres, which tend to be more defensive than smaller, secondary centres through a down cycle. Income growth will be boosted over the coming year by Hyprop’s Rosebank Mall in Johannesburg, which was recently refurbished and expanded. “Very low vacancies across the portfolio mean that the group can pick and choose the best possible tenants for new lettings.”
Chetty expects Nepi to continue to deliver dividend growth of 14%-15% for the coming financial year. “The company’s track record of distribution growth has been impressive — around 12% compounded since 2008. This despite the global financial crisis and subsequent recession as well as low and declining gearing of only 11%.’’
Prospects for growth in Romania, where Nepi focuses, look good as the country is still undersupplied in retail space relative to its size and income. “Despite marginally higher GDP per capita and retail sales per capita than SA, Romania has only one-third of SA’s shopping centre space per capita.”
Chetty says Emira, which was out of favour for some time due to the company’s overexposure to the struggling secondary office market, has staged an impressive turnaround. “Management has sold off underperforming assets and executed on yield enhancing acquisitions and refurbishments. Strong rental growth and lower vacancies across the portfolio bode well for future net asset value uplifts. We expect to see strong dividend growth and future acquisitions to bulk up the asset base.”
Maurice Shapiro, co-founder of Ma’Alot Investments, ranks the Wapnick family’s Octodec Investments (which last year merged with sister fund Premium Properties), sector heavyweight Redefine Properties and Vukile Property Fund as his top buys.
Octodec’s focus on office to flat conversions in the inner cities of Pretoria and Johannesburg will drive consistent income growth over the next 3-5 years as the urbanisation trend continues.
Shapiro says Redefine is an attractive recovery play. He believes the discount at which the stock still trades relative to peer Growthpoint Properties is not entirely justified. “Management has over the past five years successfully modernised the underlying property portfolio through redevelopments, acquisitions and disposals. The company has also restructured its offshore offering and plans to increase exposure to rand-hedge opportunities.”
Vukile, which owns a number of township and rural shopping centres and a 50% stake in the East Rand Mall in Boksburg, also offers value at current levels. Says Shapiro: “Vukile has an exceptionally competent management team that knows how to sweat its assets. The fund has cleverly restructured its government-tenanted office portfolio while simultaneously improving its black economic empowerment (BEE) rating.”
Analysts agree that a key theme into the future will be investors’ search for rand-hedge opportunities. Howard Penny of RMB Morgan Stanley says despite a strong share price performance from many of the JSE’s pure offshore property plays in recent years, rand-hedge counters still stand out as relatively attractive buys within the larger sector.
These include the likes of London-focused Capital & Counties Properties, UK mall owner Intu Properties, Nepi and sister fund Rockcastle Global Real Estate Company, Western European-focused Redefine International, MAS Real Estate and Stenprop, as well as Investec Australia Property Fund.
“Real earnings growth, greater relative yield compared to SA’s bond benchmark and lower interest rates are key advantages offered by offshore real estate markets. This, together with pockets of oversupply in SA relative to a more muted demand growth trajectory, still point to greater potential returns from offshore property stocks relative to purely SA-focused counters.”
Penny says the better returns on offer offshore have prompted players such as Growthpoint, Redefine, the Resilient group, Attacq and Hyprop to expand their portfolios beyond SA.
In fact, Penny notes that dollar (US and Australian), pound and euro revenue as a percentage of total earnings for the sector has surged from as little as 2% in 2010 to over 22% in 2014.