The divergence in performance among the JSE’s 50-odd real estate stocks is now so great that the gap between the top and bottom stocks exceeds a colossal 140%.
For the 12 months to end-January, German business park owner Sirius Real Estate rallied 60%, while embattled mall owner Rebosis’s A shares shed a staggering 86%.
That compares with an average drop of 12% for the SA listed property index (Sapy) as a whole over the same time and brings the sector’s average decline over the past two years to about 30%.
The volatility is equally pronounced over the short term.
For instance, Rebosis’s B shares surged 31% in January — arguably from a rock-bottom base — while UK mall owner Intu Properties dropped 45% over the same time.
That compares with the Sapy’s overall drop of 3% last month.
Analysts say investors had better prepare for such performance divergence for at least the next two years. Craig Smith, head of real estate research at Anchor Stockbrokers, cites a number of reasons for the trend: higher levels of uncertainty due to geopolitics, record low global bond yields and the fact that the SA listed property sector is exposed to numerous offshore markets that are not necessarily at the same stage in the property cycle.
Smith says SA-specific issues that will also continue to weigh on the returns of SA real estate investment trusts (Reits) include policy uncertainty, negative consumer sentiment and low investor confidence.
To top it all off, earnings will remain under pressure due to weak rental growth amid an oversupply of office and retail space.
In a nutshell, says Smith: "Stock selection remains paramount."
A company’s performance will depend heavily on factors such as the quality of the firm’s building portfolio as well as its management team; the diversification on offer, both in terms of sectors and geographies; and balance sheet strength.
Why, then, should anyone take a chance with listed property?
Analysts say the key reason Reits still belong in a balanced investment portfolio is the ability of this sector to deliver a relatively high, and growing, income stream.
Moreover, the two-year decline in property share prices means there is now value to be had for yield chasers.
Investec Asset Management portfolio manager Peter Clark says the significant correction in property prices over the past two years means that most of the bad news is already priced in. "So we are starting to see more value emerge in the form of attractive yields."
In fact, the slump in property share prices has pushed up the yields offered by a number of prominent real estate companies to between 11% and 13%. These include Hyprop Investments, Growthpoint Properties, Redefine Properties, Investec Property Fund, Vukile Property Fund, Polish-focused EPP and Africa-focused Grit Real Estate.
Former market darling Fortress Reit B is offering as much as 21.5%. Consider that a little over two years ago, this share was one of the sector’s priciest, at a yield of below 5%.
Dividend yields north of 10% are compelling, compared with the average 6.5%-8.5% interest that investors can earn on money market accounts or fixed deposits in the bank.
The added benefit listed property offers — and fixed deposits and money market accounts don’t — is the potential for income payouts to grow annually (albeit at the risk of fluctuations in capital values).
Even so, Stanlib head of listed property Keillen Ndlovu warns investors not to look at yield alone. "Though companies with yields above 15% may look enticing, they come with much higher perceived risks," he says.
He considers Reits that are trading at yields of between 10% and 15% as the most "investable" in the current environment, "as long as any potential risks are manageable and priced in".
Ndlovu says investors must remember there is usually a reason why certain stocks are more expensive and thus trading at lower yields (typically below 10%). One would normally pay more upfront for significant offshore exposure, above-market earnings growth prospects, a great quality or defensive portfolio, or low debt levels.
Though investors need to consider the dividend growth prospects of individual companies, Ndlovu says one shouldn’t avoid counters with a low or even negative growth outlook, "as long as this is priced in — in other words, the stock offers a high enough yield to compensate for any lack of short-term growth".
Ndlovu forecasts zero dividend growth on average for the sector this year, but there will be exceptions.
In fact, Anchor Stockbrokers’ forecasts show that at least a third of the JSE’s 20 largest property counters are still estimated to achieve inflation-linked (more than 4.5% a year) dividend growth over the next three years.
Ndlovu doesn’t expect much in the way of capital growth this year either. His one-year total return (income and capital) forecast is for only about 6% (base case), which should recover to 11.45% a year (base case) over the next four years.
The key question, then, is which individual stocks fund managers believe will outperform the market over the next 12 to 24 months.
Clark is placing his bets on mall owner Hyprop, Sirius and MAS Real Estate — the Central and Eastern European property owner and developer now run by former Nepi Rockcastle co-founder and CEO Martin Slabbert.
Hyprop owns attractive assets that should outperform other SA mall portfolios over the longer term. These include the Rosebank Mall, Hyde Park Corner and Clearwater Mall in Johannesburg, and Canal Walk, Somerset Mall and Capegate in the Western Cape. Clark says Hyprop, which also has stakes in a number of malls in southeastern Europe and the rest of Africa, has been oversold.
Both Sirius and MAS generate 100% of their earnings in hard currency and still offer decent growth prospects.
Ndlovu believes offshore counters will continue to outperform SA-focused ones this year. EPP is his top rand hedge pick.
"EPP offers a yield of more than 11%, which looks cheap given the quality of its Polish assets. Higher debt levels as well as lower short-term growth prospects, due to the company’s structure, are already priced in." He adds that the Polish economy is still on a positive growth path, with GDP forecast to grow at about 3% this year.
However, Ndlovu says diversification is important, so one should also look at local companies that offer sizeable exposure to overseas property markets. Redefine and Resilient are his preferred picks in this regard.
"Redefine, which has offshore exposure of more than 25% — primarily to Poland — is trading at almost 10-year lows and offering a dividend yield of over 13%. In addition, management is making headway in fixing the balance sheet by selling some assets and reducing its payout ratio with virtually no tax leakage."
Resilient, which was last year cleared of allegations of insider trading and share manipulation by the Financial Sector Conduct Authority, is expected to achieve earnings growth of about 5%, which Ndlovu says is attractive in the muted SA growth environment.
Ndlovu says the company has one of the lowest debt levels in the sector, owns a portfolio of defensive retail assets and offers offshore exposure of more than 25%, mostly via Nepi Rockcastle.
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