The beleaguered property sector’s sharp and unexpected rally earlier this month caught many off-guard. Yet the SA listed property index’s (Sapy) rebound of close to 25% in the first 10 days of June was long overdue.
No doubt it was becoming increasingly difficult to ignore the unbelievable discounts to NAV of 50% plus and the sky-high yields, exceeding 30%, offered by many traditional blue chips.
Despite a slight pullback late last week, sector heavyweight Redefine Properties is June’s star performer. If you bought the company’s shares at the end of May you would have achieved a staggering 79% capital return within nine days (see table). Fortress Reit (B shares) is up an impressive 70% over the same time.
It seems investors are also climbing back en masse into stocks that own sizeable shopping centre portfolios, most of which have been badly bruised in recent months.
These include UK mall owner Hammerson, Eastern European-focused companies EPP and MAS Real Estate, Fourways Mall owner Accelerate and fellow SA-focused Hyprop Investments and Vukile Property Fund — all of which boast share price gains of close to 40% or more in the first two weeks of June.
However, some real estate investment trusts (Reits) have actually increased their losses this month. These include Rebosis A and Dipula B.
So is June’s rally a flash in the pan, or a sustainable recovery? Nedbank CIB analyst Ridwaan Loonat believes the sector is likely to hold on to most of its gains given its oversold position. That’s despite the probability of ongoing profit-taking and volatility, he says.
"Sentiment is clearly improving. Investors globally are turning to riskier assets and are now searching for value, which is evident in the stronger rand," he says.
What’s more, JSE-listed mall owners are seeing a faster than expected recovery in footfall numbers at many of their malls, both in SA and abroad, which he argues has supported demand for retail-focused property stocks. "Rental collections in SA have also been encouraging, averaging 77% in April and 70% in May for the sector as a whole," he says.
Ninety One portfolio manager Peter Clark has a similar view, saying demand for property shares are in line with increased global appetite for risk-on investments as well as other interest rate-sensitive sectors such as retailers and banks.
He notes that despite the bounce in property share prices this month there’s still value to be had, given that the Sapy remains more than 35% down in the year to date and about 60% below its peak at the end of 2017.
"Remember, if a share goes down by 80%, it has to go up by 400% to get back to the same place. Hence bounces off a low base can be large in percentage terms," he says.
Clark believes Redefine, Vukile and Hyprop, in particular, still look relatively cheap on a valuation basis. "Though these stocks are up more than 70% from their respective six-month lows, they are all still down more than 50% in the year to date."
However, it seems highly unlikely that the Sapy will recoup all of its 2020 losses in the short term. Keillen Ndlovu, head of listed property funds at Stanlib, expects total returns to remain in double-digit negative territory for the year as a whole owing to the magnitude of the challenges faced by the sector.
He refers to the potential for underlying properties in many listed portfolios to be repriced downwards over the coming months on the back of rising vacancies and arrears if tenants — particularly those that remain in lockdown, such as restaurants, bars, cinemas, beauty salons and hair salons — struggle to pay their rent.
"A sustained recovery will be a function of how the SA economy holds up and how long the various lockdown levels last," says Ndlovu. "Most property stocks are also unlikely to pay dividends over the next year as they try to strengthen their balance sheets."
That means investors that are heavily dependent on an income are unlikely to return to the sector any time soon. "In the short term property will be more of a capital play, as opposed to its traditional role as an income play," Ndlovu says.
Craig Smith, head of real estate research at Anchor Stockbrokers, agrees that the property sector is not out of the woods just yet. He says given the numerous headwinds still facing property companies, most now have to focus on strengthening liquidity positions and balance sheets. He cautions that stock picking is therefore more important than ever. "In the current environment it is especially critical to identify and invest in Reits with defensive portfolios, robust balance sheets and highly competent management teams," he says.
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