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An eye-popping 57% gap between SA’s best-and worst-performing property unit trust funds underscores just how critical stock-picking has become. And the volatility in what had been a predictably lucrative asset class is also something of a crisis for SA’s property-loving, dividend-hungry investors.
For example, the Meago Enhanced Global Property Prescient Fund, a rand hedge play, produced a 30% total rand return for the 12 months to the end of May, according to Morningstar and the Association for Saving & Investment SA.
In stark contrast, Nedgroup Investments Property Fund’s dismal -27% return over the same time places it at the bottom of the 12-month ranking. The fund has 100% exposure to SA, but its performance is still well below the local peer group’s average -10%.
"It’s no longer about simply betting on the index," says Evan Robins, who runs Old Mutual’s SA Quoted Property Fund.
For instance, the price of Rebosis B shares is down close to 70% over the year to date, while Hospitality Property Fund is up nearly 30% over the same period. Similarly, dividend growth varies from a high of 12% from warehouse-focused Equites to a catastrophic -75% from Rebosis B.
Of course, stellar returns by global property unit trust funds have been flattered by the weak rand, which has lost about 13% against the dollar and 9% against the euro and pound in the year to end-May.
But most offshore property markets are also delivering better growth on the back of stronger-performing economies than that of SA.
Analysts say the poor returns generated by most SA-focused unit trust funds over the past 12 months have to be seen in relation to last year’s 30% crash in the SA listed property index (Sapy), which tracks the JSE’s 20 largest property stocks by market value. In 2018 Sapy had its worst calendar year performance on record.
The Sapy was initially dragged down by a sell-off of the Resilient stable of companies, including Resilient Reit, Fortress Reit and Nepi Rockcastle. But the sector also lost favour among income chasers due to weaker company earnings.
What’s more, most property counters have seen dividend growth slow to the low single digits over the past 12 months. Some have even reported a drop in payouts — a far cry from the 10%-14% dividend growth investors routinely enjoyed between 2014 and 2017. Lower dividend growth comes on the back of little, if any, new demand for retail and commercial space amid a stagnant economy, which has seen rentals fall and vacancies rise.
This volatile new reality has been something of a nasty shock for retirees and other income dependants.
But Robins believes retail investors need to understand that property is not a risk-free asset class.
Craig Smith, head of research at Anchor Stockbrokers, says investors have to take a longer-term view. "Real estate is cyclical. And once we see GDP growth numbers recover to sustained levels of 2.5% a year and more, property fundamentals will also improve." Besides, Smith believes income investors are still better off in listed property than most other income-generating investments, especially new investors.
He says depressed share prices, which have pushed dividend yields to 10-year highs, present an attractive entry point for income-focused investors. A number of SA real estate investment trusts (Reits) are now trading at yields of 12%-20%, way ahead of the average 6%-8% seen two years ago.
However, Smith warns that investors have to adjust their total return expectations downwards. "The reality is that the higher initial yield is likely to compensate for lower dividend growth going forward, which is likely to be the new normal from now on."
Investors, says Smith, should spread their risk across geographies.
"However, I would rather now be buying into a market that is potentially near the trough — like SA Reits — as opposed to Reits in developed markets that are potentially at peak pricing."
That’s a sentiment shared by Allan Gray portfolio manager Mark Dunley-Owen. Allan Gray, which has historically been underweight in listed property, has recently started to selectively increase its exposure to SA Reits.
But Dunley-Owen stresses that investors should be wary of index-tracking strategies. "Stock-picking is very important at this part of the cycle. Sometimes it’s more about what you avoid versus what you hold," he says.
Allan Gray favours property companies run by management teams aligned with shareholders, which use appropriate financial gearing and focus on cash flow rather than accounting earnings. Dunley-Owen’s picks include Attacq, Octodec, Fortress and Equites, though the latter is no longer cheap, he says.
A negative return of 9.3% is hardly ideal, but Old Mutual’s SA Quoted Property Fund managed to beat both the Sapy and the all property index in the year to April 30. Robins ascribes his fund’s relative outperformance to its being underweight to the SA retail sector and holding sizeable positions in niche companies. These include German business park owner Sirius; the JSE’s only self-storage play, Stor-Age, and Vukile, which owns a portfolio of SA malls that cater mostly to lower-income shoppers, and a sizeable portfolio of Spanish retail centres. "I have also avoided companies with idiosyncratic challenges that did poorly over the period, such as Rebosis, Accelerate and Attacq," he says.
Robins’ other large positions include Growthpoint Properties and Redefine Properties, both of which offer a sizeable offshore exposure to, among others, Australia and Poland, and pure rand hedge counter Nepi Rockcastle, the largest shopping centre owner in Central and Eastern Europe.
Sanlam Private Wealth’s preference is for specialist, niche property funds. Like Robins, the company’s equity analyst Richard Colburn singles out Stor-Age and Vukile as his current top picks.
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