Income chasers who have in recent years become accustomed to receiving double-digit increases in dividend payouts will no doubt be disappointed by the lower growth numbers reported by real estate counters in recent weeks.
Analysts expect dividend (often referred to as distribution) growth to slow to around 6% for the listed property sector as a whole this year. That is still slightly ahead of inflation, but noticeably down from the average 9% achieved by JSE-listed property stocks in 2017.
One of the themes that has emerged from recent results is that most SA-focused property companies are experiencing an uptick in vacancies across their office, retail and residential portfolios. When it gets harder to let out empty space, landlords are forced to become more negotiable on rentals. And when rental growth slows — or dips, as in the case of some companies — dividend payouts to investors grow at a slower rate.
So far, the only property companies that have achieved double-digit dividend growth for the February/March reporting period are specialist logistics-focused Equites Property Fund (12.2%) and rand-hedge infrastructure company Greenbay Properties (25%).
Some firms, most notably those with exposure to the rental housing market such as Octodec Investments and Indluplace Properties, have reported negative or flat dividend growth for their latest reporting periods (see table). The vacancy rate in Indluplace’s rental housing portfolio of almost 10,000 units rose from 4.5% to 6.3% in the 12 months ending March.
Octodec, which owns a large portfolio of rental flats in the Pretoria and Johannesburg CBDs as well as in Hatfield, Pretoria, is similarly experiencing a tougher operating environment. Rental growth in Octodec’s residential portfolio slowed to 1.4% for the six months ending February, mainly on the back of increased housing supply in Hatfield and the Pretoria CBD.
Industry players say that despite the positive changes in SA’s political landscape, improved business and consumer sentiment has not yet filtered through to increased take-up of office, retail and residential space.
Redefine Properties CEO Andrew König believes there won’t be any meaningful increase in demand for space in SA until the economy starts growing by at least 3.5%, effectively double the current GDP growth rate.
"Despite confidence levels being at their highest point in many years, we still have a long road to travel. Recovery won’t happen overnight," König said at the company’s interim results presentation last week.
Redefine is one of SA’s largest property owners. It owns a well-diversified retail, office, industrial and student housing portfolio worth R68.7bn, and is regarded as a good bellwether for the state of the SA economy.
Redefine reported a 5.5% increase in distributions for the six months ending February, which was supported by a strong performance of its offshore property interests. The latter, worth R16.9bn, are spread across Poland, the UK and Australia.
The overall occupancy rate in Redefine’s SA portfolio has remained fairly static. Its office portfolio has the highest vacancy at 8.1%.
"There has been no new demand for office space. While new buildings continue to be added to the market in key nodes such as Sandton and Rosebank, it’s simply a case of musical chairs," said König.
Shopping centres also appear to be taking more strain. Redefine’s retail vacancy rate rose markedly from 3.3% to 4.4% for the six months ending February (year-on-year). König said the retail sector had become more challenging as the battle for market share intensified. "We have in recent months seen a significant pushback from retailers on lease terms," he said.
Tenant retention is central, which König said comes at a cost as it is now tougher than ever to negotiate rental increases, especially with the large national retailers.
Rebosis Property Fund, which owns six large shopping centres in Gauteng and the Eastern Cape, including Forest Hill City in Centurion and Baywest Mall in Port Elizabeth, has also reported an uptick in retail vacancies, from 0.6% at the end of August 2017 to 1.3% at the end of February.
Both Redefine and Rebosis have recorded low single-digit growth in trading densities (sales turnover/m\²), an important metric used to measure retail performance. That’s down from 7%-8% recorded by most mall owners only two or three years ago.
Meago Asset Managers director Jay Padayatchi says the latest results reported by listed mall owners reflect the plight of the SA consumer. But there appears to be light at the end of the tunnel, with confidence improving in the post-Zuma era, which Padayatchi says should support consumer spending. "That will start filtering through to trading density growth and potentially higher rental reversions."
However, he doubts whether the office market will show any improvement in the short term given the high correlation between GDP growth and office take-up. "Offices continue to be the laggards across most portfolios. The new supply is seemingly endless, which leaves owners of lower-grade space struggling to fill vacancies and hanging onto current tenants at all costs," says Padayatchi.
He notes that the premium-grade industrial sector is still the darling of the commercial property market and that demand for appropriately priced, high-spec warehousing and logistics space is "seemingly insatiable".
Kelly Hook, investment analyst at Metope Asset Managers, echoes the sentiment, pointing to latest Investment Property Databank figures, which confirm that industrial property is now SA’s most profitable real estate sector — a total return of 12.3% was achieved in 2017.
But Hook notes that there is a significant divergence between the performance of hi-tech industrial property (modern logistics and distribution centres) and that of low-grade, manufacturing warehouses and mini-units.
Says Hook: "Prime space and industrial nodes with access to good transport routes remain in demand.
"However, property funds holding on to old stock and outdated sheds will be required to redevelop these or risk rising vacancies, as obsolescence is increasing in this sector."
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