In a unit trust environment with little appetite for specialist funds, the success of the property sector has been an anomaly.
With R39.6bn under management it is substantially larger than the specialist equity sectors combined. Property shares seemed to offer a combination of equity-like returns with bond-like volatility. In the end they could not escape their age-old correlation with bonds and as SA’s sovereign debt ratings fell so did the prices of the property sector.
Over the past five years, the sector has given negative returns of 7% a year. There are signs of improvement: after losing 55% of its value at the trough, the property sector is up 24% year to date.
There are definitely legitimate Covid-specific concerns about property. Would corporates now sublet a large chunk of their head offices as their employees worked from home, and would shoppers shift to online sales? Evan Jankelowitz, co-manager of the Sesfikile Fund, expects that the move to work from home will lead to a cut in office demand of 7%-10%. He says that corporates will need to keep space if they intend to maintain and develop a corporate culture.
And there is also grey space; 15% of office space is being sublet to other corporates. It is unlikely that landlords will be able to push through new rental increases for several years. It is just as well that most major building projects in areas such as Sandton have already been finished.
But there are no dedicated office-based property shares on the JSE. The future of retail property is by far the biggest consideration. Fourways Mall, which reopened a few months before Covid, is likely to be the last megamall to be built in SA for at least five years, even a decade. Online retailing has increased, but Keillen Ndlovu, manager of the Stanlib property fund, says only from 2% to a maximum of 4% of sales, well below the 20% level seen in the UK.
Ndlovu says the days when listed property shares traded at a premium to their net asset value will not return. The 50% discounts experienced at the depth of the slump were too high, but at best the shares will trade at a 10%-15% discount under "normal" conditions.
In particular SA investors have consistently been prepared to pay a generous premium to the non-SA shares listed on the JSE with their foreign currency income. A share such as EPP was forgiven its ropey balance sheet as it generated hard currency in Poland. Some reputable fund managers continued to own shares in Intu (previously Capital Shopping Centres) which had an even worse balance sheet and as a UK business was right in the firing line of the online retailing phenomenon. Intu is now dead as a dodo.
The environment changes quickly. Until recently the SA-only Nedgroup Property Fund seemed in a strong position as it focused on convenience shopping centres close to taxi ranks. Many of its centres were destroyed in the recent riots. This might seem like a problem primarily for the insurers, but it could lead to an exodus of smaller tenants.
Listed property remains full of bargains, but some could be value traps in the same way that Intu was. We look at five real estate funds and the different ways they approach this challenge.
Nedgroup Investments Property Fund
The fund is managed by Ian Anderson from Counterpoint. His Durban-based team was known as Bridge but it recently merged with Counterpoint, a Cape-based manager with a similar value philosophy.
He says the fund now has more than R1bn under management, and it would not have been able to grow the fund to this size on its own, as a small asset manager with a small reach. It is the fund to go to for exposure to property small caps. He says it is not in the mandate to focus on smaller shares but it is the only fund in which neither Growthpoint nor Redefine nor Nepi Rockcastle appear in the top 10.
He says SA investors have been prepared to pay a large premium for shares with offshore exposure, even though they provide substantially lower distributions. "Many local shares have cut or not paid dividends over this past year, but investors are compensated by discounts to net asset value of 30% or more."
Anderson prefers specialist shares such as Stor-Age (7% of the fund) to more diversified shares such as Growthpoint and Redefine and he prefers shares that specialise in neighbourhood and convenience centres such as Fairvest (11% of fund) and Safari (9.4%) over more glamorous urban counters such as Hyprop, but the fund has exposure to the metropolitan mall sector through Accelerate (5.2% of fund) owner of the Fourways Mall, as it is very cheap.
But Anderson is not that optimistic about the prospects for the much larger nonmetropolitan malls in the Resilient stable — especially after the recent looting of many centres. The only foreign exposure is through Grit (5.8%) but this is focused on the rest of Africa, including Mauritius, not on the overtraded Central and Eastern European region. Even so, Grit’s large Mauritian hospitality portfolio has struggled during lockdown.
Anderson says the Nedgroup fund has limited exposure to premium and A-grade property in SA, which has come under pressure. Among the largest shares in the fund are Dipula B (10.2%), Tower (10.1%), Indluplace (7.9%), Spear (6%) and Arrowhead (5.1%) which will soon join forces with Fairvest.
Discovery Flexible Property Fund
The fund is run by Ninety One, and over the past three months management has changed from Peter Clark to Ann-Maree Tippoo and Luqman Hamid.
As a flexible fund it is allowed to diversify into bonds and other interest-bearing securities and derivatives, but in practice it is a pure property fund. It has just a 1% exposure to cash.
Tippoo says it differs from the Ninety One Property Fund as it can invest up to 30% in non-JSE property shares, though it has just a 12% exposure right now. Almost 40% of the fund is made up of the big three: Growthpoint, Nepi Rockcastle and Redefine. No non-JSE share makes its top 10, though it holds a portion of its Hammerson holding through its London-domiciled shares.
Tippoo says the fund has been a patient investor, but fortunately was not invested in Intu, the large UK shopping centre owner which went into administration in June 2020.
Nepi Rockcastle (12.3% of the fund) and MAS Real Estate (4.9%) are the two largest offshore exposures in the fund.
The fund has access to niche plays overseas, such as data centre specialists, cellphone towers and large German residential funds. It also holds German-focused JSE-listed counters Sirius and Deutsche Konsum.
Offshore funds have not done as well in the recovery of the past seven months as local funds, so that 12% exposure could increase.
But SA property shares are still in many cases at a 30% discount to their NAV. Some, such as Vukile — owner of East Rand Mall — have been punished by taking an aggressive stance with their balance sheets, refusing to reduce gearing in spite of market pressure.
Tippoo prefers the nonmetropolitan portfolios in Resilient and Fortress. But unlike most of its competitors, the Discovery fund also has an exposure of almost 5% to Hyprop, owner of the affluent Hyde Park Corner, Rosebank Mall and Canal Walk.
She says she has full faith that the SA property sector will consolidate. Fairvest is in the process of taking control of Arrowhead, for example. Both businesses specialise in convenience retail centres.
As a hybrid income/total return fund, it is happy to invest in Attacq, which developed the popular Waterfall precinct in Midrand. It makes up 4.3% of the fund, and provides a 6.4% yield, which could grow. It also owns the out-of-favour SA Corporate, now on an 8.8% yield.
Metope Property Fund
The portfolio is managed by Liliane Barnard, previously the property analyst at Old Mutual. It has much more flexibility than, say, Stanlib, as there is just R78m under management.
Barnard has tried to create a pandemic-proof fund, with significant holdings in logistics specialist Equites and in Stor-Age. She holds the Poland-based shopping centre giant EPP, as Poland has not experienced anything like the penetration of online retailing in the UK or even SA.
Neither Growthpoint nor Redefine appears in her top 10. She says Redefine was forced to give rental discounts of R81.5m and deferrals of R26m, leading to a 22% decline in income.
She prefers niche shares such as Cape Town-focused Spear, with properties in strong nodes such as Century City and Paarden Eiland as well as some recovery potential from its high-quality hotel asset 15 on Orange.
Fairvest is another top 10 share in the fund. It has a portfolio of mainly retail properties convenient for taxi commuters, which have come under pressure from the recent looting. Barnard says the good news in the more affluent sector is that we are likely to have seen the last of the new mega-malls, after the huge expansion of Fourways Mall (owned by Accelerate, in which she hasn’t shown much interest).
And she says some property counters have managed well in the crisis, particularly Vukile, one of her top 10 holdings.
It is noticeable that Barnard has no UK exposure, avoiding Hammerson and Capital & Counties (Capco), though she says there will a time and a place for Capco as a high-quality asset. She is disappointed that the more quirky offshore-focused shares such as Grit and Atlantic Leaf are no longer on the JSE. The fund’s main international plays now are Nepi Rockcastle and MAS Holdings, along with EPP.
Metope also runs a Property Income fund with a higher SA holding.
Stanlib Property Income
With R5.4bn under management, this is the old grey lady of the real estate fund sector.
Its competitors will tell you that its size makes the fund inflexible.
It is true that most of its investments are in the largest 50% of property shares. But it can express individuality. It tweaks its positions in the big three, Nepi Rockcastle, Growthpoint and Redefine; its Growthpoint holding is a negligible 0.23% above its benchmark weight, though the Nepi and Redefine ones are more than 1% above. But it excludes some mid-tier shares, such as its sister company Liberty Two Degrees, SA Corporate, Stenprop, Fortress B and Lighthouse Capital. Its largest overweight holding is in Vukile, almost 50% above its index weighting at 6.7% of the fund.
Fund manager Keillen Ndlovu says the fund looks for liquid shares with good balance sheets and governance; few of the small cap shares meet these criteria. He says Vukile was way oversold, and he is confident its assets in Spain — about half of the portfolio — will rebound after a successful vaccine roll-out.
Vukile’s discount to net worth has narrowed, but only from 50% to 40%. But Ndlovu remains sceptical about some other shares with offshore income. "Capital & Counties has been hit hardest by the [lockdown as its main asset in Covent Garden depends on the restaurant trade. With lockdown being lifted in the UK we can look at it again."
Ndlovu likes Nepi as a proxy for Eastern and Central Europe, where it owns many of the top shopping centres. He has more concerns about EPP, a retail landlord focused on Poland that has a poorer quality balance sheet, but he is nonetheless overweight given his macro-view of the region.
Locally, the fund has trimmed exposure to Hyprop. The owner of upmarket malls such as Hyde Park Corner has been a strong performer on the JSE recently. The big urban malls have been hit by lockdown hard, as cinema trade and conference business has halted, Ndlovu says. He likes logistics specialist Equites and Stor-Age, but says they are now fully valued and there are better opportunities elsewhere.
Sesfikile BCI Property Fund
This is a focused BEE fund manager, which offers a domestic and a global property fund.
Founder Evan Jankelowitz says the fund is benchmark cognisant, and aims for consistency. It aims to beat the benchmark by 2% and it has managed to outperform by 4% after fees. He says the fund has a concentrated index so it is unlikely ever to hold no shares in Growthpoint, Redefine or Nepi Rockcastle, but the weightings change. It has moved from an underweight position in Redefine to an overweight over the past two years, and it currently has a two percentage point underweight in Nepi.
He is impressed with the way Redefine has cleaned up its portfolio, divesting RDI in the UK and its student accommodation business in Australia. Growthpoint has the best offshore asset of any SA business, he argues, in Growthpoint Australia — predominantly in logistics, but the mother share in SA remains relatively expensive.
He says the Sesfikile fund should not be seen as an enhanced index fund. Apart from the big three it is prepared to exclude shares from the portfolio if they are overpriced or their mix of assets looks unattractive. Over the past year it has held very few Hammerson, Hyprop or SA Corporate shares. It sold out of Stenprop once it was fully priced. Jankelowitz says this is a total return fund, and not solely focused on dividends. In fact Sesfikile welcomed Redefine’s decision not to pay a dividend in order to strengthen its balance sheet.
It holds Capital & Counties, with a yield of less than 1% as it owns the Covent Garden retail precinct in London, an "irreplaceable" asset, and also has interests in nearby West End properties through its slice of the Shaftesbury portfolio.
Jankelowitz says after being underweight in Resilient three years ago, as questions were asked about its governance structure, it is now overweight. "We are happy with the way it discloses its balance sheet," he says. Resilient’s portfolio of nonmetropolitan shopping centres has held up better than the metropolitan centres held by counters such as Hyprop and Liberty Two Degrees.
The Sesfikile fund is restricted to shares on the JSE, and keeps cash holdings at about 5% so that it can buy shares quickly when opportunities arise. It holds a number of shares that have almost all their assets overseas such as Irongate (previously Investec Australia), and MAS Real Estate and Sirius, both focused in Central Europe. It holds a number of high paying A shares, such as Fortress A and Dipula A.
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