The prices of JSE-listed property stocks continue to see-saw, which suggests investors aren’t betting on a sustained recovery in their own backyards any time soon.
That’s hardly surprising given the barrage of difficulties dampening the earnings and dividend growth outlook for SA real estate investment trusts (Reits). They include a lockdown-induced rise in rental arrears and vacancies, anaemic consumer spending, ever higher operating costs, stretched balance sheets and, of course, renewed load-shedding.
However, fund managers remain bullish about global real estate.
Old Mutual Wealth investment strategist Izak Odendaal says that while the group is bearish about local property stocks, investors should take a fresh look at global listed property.
He cites three key factors that make offshore Reits worth a punt.
First, unlike equities, global property hasn’t yet run up to expensive levels.
Second, the decline in global interest rates not only makes Reits a more attractive proposition than bonds, but it also helps to lower property companies’ debt repayment levels.
It should be noted, says Odendaal, that overall debt levels are still manageable.
Third, the global listed property universe is "extremely" diversified and specialised — offered not only across countries, but, more critically, across sectors too.
This is key.
Odendaal argues that stock picking on a sectoral basis will become increasingly important, given how pandemic-induced social distancing will reduce the value of some types of property while the reverse is true for others. He points to the FTSE Epra Nareit global real estate developed index, which shows a growing divergence in the performance of various sectors.
"Perhaps the biggest trend that has been supercharged by Covid-19 is the shift to online shopping," says Odendaal.
He refers to share prices of mall-focused Reits falling much faster than the broader Reit market when the coronavirus pandemic first hit the world in March. Similarly, hotel Reits have been hammered by lockdowns in most parts of the world. Both these sectors recovered at a much slower pace than the rest of the market in the second quarter.
By contrast, the rise in e-commerce and data usage as well as an acceleration in the work-from-home trend has clearly boosted demand for data centres, infrastructure such as cell towers and telecoms networks, logistics buildings and residential property.
Rob Hart, who runs Fairtree Asset Management’s offshore property funds, agrees that stock picking is now the name of the game. Fairtree’s Global Real Estate Prescient Feeder Fund topped the performance charts among SA’s 20-odd SA-run developed markets property unit trust funds in both 2018 and 2019. The fund has continued its outperformance in the year to date, which Hart ascribes to being overweight in regions and sectors least affected by the impact of the coronavirus.
In terms of geographic exposure, Hart favours Asia and is underweight in Europe.
He focuses only on developed markets, which he believes will have a much faster recovery in economic growth and employment levels post-Covid than their emerging counterparts. These include Singapore, Australia, Japan and Hong Kong, among others.
As far as individual sectors go, Hart likes data centres, which he sees as a play on increased demand for tech-driven products, as well as logistics/industrial properties on the back of rising e-commerce, self-storage and housing funds. He is short on sectors that have been most exposed to the virus, including lodging/hotels and shopping centres.
Hart, who lived and worked in Singapore and Hong Kong for 20 years, is particularly bullish about Asia, as the region is now home to two-thirds of the world’s population. "That will be a strong driver for real estate demand over the next 10 years," he says.
He recently launched the Fairtree Global Listed Real Estate Fund, a US dollar-denominated property-focused unit trust fund to meet increased demand among SA investors to cash in on offshore growth opportunities.
The launch of the fund comes on the back of interest by South Africans who are increasingly looking to invest money they already hold offshore instead of rands.
Hart explains: "Many SA investors don’t want to return money to SA and take it out again. By investing directly in dollars, euros or pounds they avoid currency risk."
The latest figures from Joburg-based asset manager Sesfikile Capital show that global Reits closed the second quarter up an average 10.23% (in dollars, as measured by the FTSE Epra Nareit index).
But the overall figure obscures big swings.
For instance, on a regional basis Australian Reits finished the second quarter ahead of the pack at a hefty 32% higher year on year.
In contrast, Hong Kong and Japanese Reits lagged behind, at -2.12% and 4.08% respectively.
But despite the growing performance gap between various regions and sectors, Sesfikile expects global Reits to deliver total returns (dividend and capital growth) of an average 11%-13% over the next 12 months.
That’s in US dollars, which is not shabby at all, considering that the SA listed property index (Sapy) is more than likely to end 2020 in the red for the third year running.
Despite a tentative rally in the second quarter, the Sapy’s total return year-to-date is a grim -38%.
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