Real estate has been one of the most favoured sectors of the unit trust market. As it evolved from a highly illiquid sector in which most shares were controlled by the founding families it became larger and more tradable. Consolidation allowed the growth of shares into the top 40, such as Redefine, Growthpoint and Nepi Rockcastle.
Until two years ago, listed property was the best-performing asset class in SA. Income was considered to be rock solid. And it is true that at their best, property shares combine the income characteristics of bonds with the growth aspects of equities.
But fund managers are shell-shocked by the events of the first half of 2020. The sector fell an astonishing 38%, even after a 20% recovery in the second quarter. The assets in the real estate funds fell from R61.1bn to R35.6bn. Only a small portion of this, R2.3bn, is attributable to outflows; the rest to market movements.
Covid-19 meant that offshore property was no longer a safe haven. Intu, the core of Donald Gordon’s Liberty International in the UK, collapsed in a mountain of debt in spite of owning blue-chip centres such as Trafford Centre in Manchester and Lakeside, east of London.
The question asked by all property investors is what lies ahead for the office market now that we have become used to working remotely, and what the future of the shopping centre as we know it is, as online purchases become the norm. Only industrial logistics — the warehouses used by Amazon and its kin — seem to have a promising outlook.
Investors can get some comfort, as real estate investment trusts (Reits) — which make up the bulk of the sector’s market capitalisation — are obliged to distribute at least 75% of their income, else the tax consequences can be severe.
The JSE has given Reits a two-month extension to their payment deadline but will not allow distributions to be waived altogether. However, it does not look as though too many more Reits will be listed. If anything, as the sector now trades on a 50% discount to net worth there are likely to be a slew of delistings.
This month we look at five important funds in the sector. All five have competent fund managers at least who can reap the benefits of the asset class, however elusive they might seem to be today.
The question asked … is what lies ahead for the office market now that we have become used to working remotely
Coronation has a property fund as part of its extensive range of sector funds and an experienced steward in Anton de Goede; though it would be naive to call him or anyone else in the sector at this time a "safe pair of hands".
The most flamboyant character in the sector is Fayyaz Mottiar, the swashbuckling manager of the Absa Property Equity Fund. This fund is not for the fainthearted. It might well outperform over the next 10 years, but expect deeper lows along the way.
This all assumes that the fund carries on in its present form. If Absa Asset Management is swallowed into Sanlam, the fund might be absorbed into the much blander Sanlam Property Fund.
Ninety One, the old Investec Asset Management, one of the warhorses of the sector, is a solid choice, though without the idiosyncrasy of when it was run by Angelique de Rauville, a Mauritian aristocrat.
Some of Ninety One’s hybrid fixed income funds also invest in the sector.
Stanlib was the first of the large managers to see the potential of dedicated property funds. When it set up a specialist unit in 2002, property was still undervalued and offered the prospect of exciting yield to clients. Keillen Ndlovu joined the team not long after it was formed. He also runs a global property fund. The relative performance has slipped in recent years, but don’t count it out. Industry heavyweight Nesi Chetty was recently lured over from Momentum.
For many people the best solution is to invest with a team that is entirely focused on property. In previous issues we have looked at Sesfikile, which has earned its spurs as a property specialist. Its rival, Meago, does not have a unit trust, though at one time it was subadviser on the Absa fund.
Catalyst is the most experienced property boutique and has several funds. Its flexible property fund has been the most successful one recently, not least because it can invest in foreign property shares and does not have to take its offshore exposure through JSE shares such as Nepi Rockcastle or Capital & Counties.
While the other four shares rarely go for more than 2% in cash, Catalyst often goes up to 15% in cash and fixed income.
Catalyst Flexible Property Fund
Catalyst, along with Sesfikile, is one of SA’s quality listed property boutiques. The business has been built up over 20 years by a core team of Andre Stadler, Paul Duncan, Zayd Sulaiman and Jamie Boyes.
The Catalyst Flexible Property Fund has a benchmark of CPI plus 4% but fund manager Mvula Seroto says it should not be seen as an absolute return fund. The rationale is that over the long term property should provide the investor with an inflation-linked return plus a premium to compensate for property risk. But over the short term it aims to outperform the SA property universe as expressed in the all property index.
The fund has 18% of its assets in the Catalyst Global Real Estate Fund. The maximum direct offshore exposure is 30%, but this can be augmented by the offshore-focused shares on the JSE such as Nepi Rockcastle, which invests in Eastern European countries such as Romania and Poland, or Capital & Counties focused on central London. Both of these shares are in Catalyst’s top 10 holdings.
Seroto says Capco was picked ahead of other UK retail plays because of its superior balance sheet and the quality of its portfolio based on the Covent Garden tourist and retail precinct.
In contrast, Catalyst was concerned about the high loan-to-value ratios at other UK-based counters such as Intu, Hammerson and RDI. In the case of Intu this has led to a collapse of the business.
Seroto says a combination of local and offshore shares provides the best risk-adjusted returns. The fund has recently enjoyed a 7% outperformance of the all property index over six months, a combination of both stock selection and asset allocation between SA and global property and cash. Its larger domestically focused shares include Growthpoint, Hyprop, Resilient, SA Corporate, Vukile (which also invests in Spain) and Equites. On a see-through basis the fund has a 46% offshore allocation.
The Catalyst Global Real Estate Fund has a 10-year track record and a five-star Morningstar fund rating. It invests in all 20 subsectors, with more than a third in the nontraditional subsectors including towers and data centres. It has been underweight poorly capitalised companies in traditional sectors such as retail and offices, and less than 3% of the global fund is exposed to retail shopping malls.
Seroto says that the global Nareit index is down 20% year to date and the Catalyst fund is down 10.5% in dollars, though up about 11% in rands.
Absa Property Equity Fund
The fund is run in the self-contained property silo within Absa Asset Management. It is managed by Fayyaz Mottiar, who usually has an above-average performance, but went off the rails briefly when he made an aggressive bet on Resilient at the time when its governance practices were questioned.
He has regained his mojo and was a massive seven percentage points ahead of his peer group in the June 2020 quarter. Mottiar warns that the fund’s liquidity can come under pressure if there are insufficient buyers or sellers of certain shares, and because the fund prides itself on steering away from the benchmark. Mottiar runs a nonbenchmark-cognisant fund, and liquidity gets quite scarce after the first half-dozen shares in the index.
Some of his large holdings have included logistics specialist Equites and the niched Lighthouse Capital. The largest share in the index, Growthpoint, is not in his top 10; Redefine, Resilient and Investec Property are the main SA counters, augmented by Fortress A and B shares. SA Corporate is a key "recovery" share in the portfolio.
His international exposure is not as pronounced as many of his peers’, with the main bet through Nepi Rockcastle as well as indirectly through Vukile and its large Spanish portfolio.
Mottiar argues that the performance of the fund over the short and long term demonstrates to investors the robustness and sustainability of the Absa Asset Management investment process and the ability of the fund to deliver attractive total returns for investors through the cycle — though don’t underestimate the randomness and luck in investment returns.
Mottiar subscribes to the broad-brush Absa house philosophy known as pragmatic value.
He believes the fund is able to withstand market shocks and is still the correct choice for long-term investors. The fund has been a frequent winner of industry awards and deserves credit for that.
Coronation Property Equity Fund
Coronation is the one house that has remained committed to sector funds, and this fund sits alongside the industrial, financial, resources and small-cap funds.
Anton de Goede has been portfolio manager and sector champion for at least a decade. With the sector down 38% in the first six months, he has a tough assignment to keep it on the road. At least it has outperformed the peer group over the past three and 10 years, though not in the second quarter of 2020.
He did well from an overweight in Fairvest and underweights in Emira and Octodec recently, but had too little Investec Australia and Lighthouse and too much Dipula. De Goede has increased exposure to perceived higher-quality shares such as Investec Property, Growthpoint and Equites while reducing exposure to Liberty Two Degrees, Stor-Age and SA Corporate.
De Goede say there is evidence that corporates are tidying up their balance sheets, notably Redefine’s disposal of its Australian student accommodation business as well as its stake in RDI. Another positive was Vukile’s sale of its holding in Atlantic Leaf.
Coronation has a hefty 19% in Nepi Rockcastle and 12.5% in Growthpoint. Its Resilient exposure is noticeably low at below 3%, lower than EPP or Attacq, which are above 3%. After Nepi, MAS Holdings (5%) and Capital & Counties (4%) are the largest offshore exposures.
Ninety One Property Equity Fund
This fund was originally run by one of the stars of property management, Angelique de Rauville, and it was run quite separately from the rest of the then Investec Asset Management team.
It is run now more conventionally as an asset class within the Ninety One framework under the less maverick Peter Clark.
Over the quarter, it had strong positions in Redefine, a recovery share, and Investec Property, which has grown into one of the solid, quality shares in the sector. A detractor was an underweight position in Fortress A. This has been a popular safe harbour in troubled times as it has preferential access to income. Fortress B can only enjoy a higher dividend in very strong years.
Clark does not like Lighthouse Capital, which has performed well recently. He says it is a highly illiquid holding company with a combination of direct property, cash and shares. Ninety One prefers to hold the shares directly.
Clark believes the sell-off in property shares has been overdone, and shares such as Hyprop and Redefine can manage the uncertainty through sufficient liquidity, a good debt maturity profile as well as highly diversified property portfolios.
Redefine is the largest share in the portfolio, along with Growthpoint. Each makes up about 13% of the portfolio. There is a further 12% in Nepi Rockcastle and 7% on Resilient. There is quite a long tail of rats and mice holdings such as 1% in Fairvest and 2% in SA Corporate, which probably needs to be rationalised, but it is a pure JSE-listed property fund, with a cash holding of just 1.5%.
Clark says he would like to see much more specialisation on the JSE, as the property sector is still dominated by diversified retail, office and industrial plays. If SA follows other markets, more specialist funds will emerge.
Stanlib Property Income Fund
Though Marriott brought out the first property equity funds, it was Stanlib under its first portfolio manager, the late Mariette Warner, that built up the first property fund of scale.
Keillen Ndlovu is the last of three original team, as his colleague Evan Jankelowitz left to start Sesfikile.
Nesi Chetty recently moved from Momentum to join Ndlovu as joint portfolio manager.
The fund has its largest positions in the biggest index stocks, Nepi Rockcastle (20%) and Growthpoint (16.5%), though it has a relatively low (5.5%) exposure to Redefine.
Ndlovu hasn’t been afraid to take chunky positions in specialist logistics business Equites (9%), which can only benefit from the growth in e-commerce, and Stor-Age (5%,) which has experienced a surge in demand for its lock-ups as businesses downsize and move.
Other than Nepi, its largest purely international holding is Sirius Real Estate (5%), which invests mainly in Germany. Stanlib avoided Intu, which will soon be delisted from the JSE as it has become insolvent.
In the short term over the second quarter Stanlib was hit by the weakness in Equites and Dipula A and underweight positions in Fortress B, retail specialist Hyprop and Lighthouse. But Investec Property, Poland-based EPP and Fairvest added to performance. Stanlib avoided some of the duds, such as Capital & Counties, Octodec and Emira. It has also avoided sister company Liberty Two Degrees, as it is bearish on the prospects of large shopping centres. The fund does not even own Hyprop, owner of quality centres such as Hyde Park Corner and Canal Walk.
Ndlovu says the Alpi is trading at a 50% discount to stated book value.
He assumes there will be no dividend growth over the next 12 months but believes the shares in the Stanlib property funds are financially strong enough to continue to make distributions.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.