Property investors who expect to see their annual dividend payouts increasing by the usual 8%-12% may be in for a rude awakening. For the first time in years, property funds that have built up portfolios of SA shopping centres, offices and industrial premises are starting to report flat or even negative dividend growth.
Last week it was the turn of Tower Property Fund, which reported a 16% drop in dividends for the 12 months to June. Next week Emira Property Fund is expected to report a 2.6% fall for the same period. Meanwhile, Accelerate Property Fund recently warned that its dividend growth would be flat for the next two years. Delta Property Fund also expects zero dividend growth for its 2018 financial year, down from a previous forecast of around 5% growth.
Others, including Liberty Two Degrees, Redefine Properties and Dipula Income Fund, have recently downgraded their growth forecasts for their 2017 financial years.
It’s all looking rather grim. Zayd Sulaiman, investment analyst at Catalyst Fund Managers, says it’s possible that more funds may yet surprise the market on the downside when they report results in the next few weeks. There are varied reasons for this: in some cases, it may be blamed on dilutive acquisitions, but in other instances it’s a reflection of tough trading conditions in a weak economy.
Sulaiman says property developers have oversupplied the market with new offices and shopping centres in recent years, which has put pressure on rentals and occupancy levels. "It will take a few years of positive GDP growth before vacancies are mopped up
and fundamentals improve,"
he says.
But there has also been a disturbing trend for property companies to distribute capital profits or one-off fees to boost their flagging dividends. This isn’t sustainable. Sulaiman cites the examples of Vukile Property Fund, Investec Property Fund and Redefine Properties, which have distributed trading profits, underwriting fees, re-instatement costs or development fees to shareholders as part of their dividends.
Growthpoint is another. It said recently that its revenues would now include development fees and trading profits. "Some companies are paying out unsustainable income streams to keep up with their peers — but the discerning investor sees through this. It is a vicious circle, but eventually the base must reset," says Sulaiman.
Craig Smith, who is head of research at Anchor Stockbrokers, believes the lower dividend growth outlook for SA-focused property funds is likely to prompt a further shift towards stocks that generate most of their earnings in pounds, dollars or euros.
"My sense is that demand for rand hedge stocks will increase, especially if the rand stabilises or strengthens, as this could present an attractive entry point for further offshore exposure," he says.
This would be good news for the likes of Capital & Counties, Intu Properties, Sirius Real Estate and Nepi Rockcastle.
Smith says the search for hard-currency income streams is given further impetus by SA’s political turmoil, as well as weak SA property fundamentals — clearly evident from the anaemic rental growth and elevated vacancies.
But it isn’t all gloom and doom for the SA property market either.
Smith says there are still pockets of growth opportunities in some sectors. Hi-tech logistics, residential and student housing as well as health care remain growth areas for property.
And he points out that some stocks that earn the bulk of their income from SA-based portfolios continue to achieve double-digit dividend growth.
This list includes Hyprop Investments, Resilient Reit, Fortress Income Fund and Equites Property Fund.
"We expect a flight to quality portfolios backed by best in class and proactive management teams that are still able to achieve inflation-beating dividend growth," says Smith.
Of course, there’s no denying that the listed property sector is showing signs of weakness. Nevertheless, some of them have been pro-active in diversifying both their properties and currency offshore to limit the fallout from the frail SA economy.
Keillen Ndlovu, Stanlib’s head of listed property, says most local property companies have already made yield-enhancing acquisitions in overseas markets, which will prop up earnings. "Debt levels are reasonable too," he says.
Ndlovu expects dividend growth of 7.5% for the sector for this year — albeit down from 10.5% in 2016 (see table). "Not exciting, but, most importantly, its beats inflation," he says.
He is forecasting a 10% total return (income plus share price growth) for the sector as a whole over the next 12 months. He says despite the headwinds facing local property stocks, the sector continues to offer income chasers a decent 7% average initial dividend yield plus inflation-beating growth.
"Investors should ride out the current period of volatility and adopt a three-to five-year view," he says.
Catalyst Fund Managers’ Sulaiman agrees. If investors can look through the cycle, he says, property stocks are likely to achieve a total return of around 13%/year on average over the next five years — barring any shocks.
"On a risk-adjusted basis, that is a fair return for listed property relative to other asset classes," he says.
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