Are SA’s malls still a hot buy?

The dismal results reported by JSE-listed property stocks in recent weeks underscore the extent to which Covid-related trading restrictions have hobbled these companies’ predictable dividends.

Mall owners, who in recent months have heavily subsidised their struggling retail tenants via rental discounts and deferrals, have been particularly hard hit. So much so that only two out of a batch of at least a dozen real estate investment trusts (Reits) that have reported results for the June period have declared a dividend and maintained a payout ratio equivalent to 100% of distributable profits — Resilient Reit and Fairvest.

Worse, most retail-focused Reits have taken a huge share price knock.

For instance Hyprop Investments, a perennial outperformer which for many years featured on almost every fund managers’ stock-pick list, hit a new 10-year low of R15 last week after it released results for the year to June.

Shares in the company, which owns landmark centres like Rosebank Mall and Hyde Park Corner in Joburg and mega-mall Canal Walk in Cape Town, are down nearly 75% year to date alone.

Vukile Property Fund, Attacq and Redefine Properties — all of which have a large retail exposure — have had similar share price losses. That compares with a drop of 54% for the SA listed property index as a whole, year to date.

The key question is: does it still makes sense for property investors to own shares that are overweight in shopping centres?

Most fund managers believe there’s still a place for retail in a balanced portfolio — provided that investors become more selective in their picks.

For example, shares in Fairvest — which owns properties like the Middestad Mall in Bloemfontein and the Bara Precinct in Gauteng — are down only 5.3% year to date, while over six months the stock has rallied a cool 69%.

Ninety One portfolio manager Peter Clark dismisses the notion that investors should exit retail-focused property stocks altogether.

He believes there’s still value to be had, particularly now that rentals are starting to approach lower, more sustainable levels.

"The implied pricing of underlying assets is below replacement costs in some instances," he says. In addition, a number of these counters are trading at discounts to NAV exceeding 70%.

He argues that smaller format, convenience-led retail centres that cater for shoppers’ daily needs will continue to do well.

Large centres that dominate their catchment areas, especially in urban areas, will start to perform again in the near term but may require further lower rental resets. Secondary or mid-tier malls are likely to struggle as retailers prioritise stronger locations.

Part of the problem is that the sector was under pressure pre-Covid because of a glut of shopping centres amid a stuttering economy.

The continued rise of e-commerce will clearly add to the sector’s woes, especially once local supply chains have been adapted to meet growing online demand.

Kelly Ward, property analyst at Metope Investment Managers, says there’s still money to be made from selected retail property stocks.

But what has clearly emerged from recent results is that the performance of shopping centres has become increasingly location-, size-and sector-driven.

She explains: "We have seen a significant divergence in performance between high-end urban malls like those owned by the likes of Liberty Two Degrees and Hyprop on the one hand, and grocery-anchored malls servicing lower-income markets on the other, which Fairvest, Resilient Reit and Fortress Reit are mostly exposed to."

The problem is that upmarket malls in the big cities are geared to discretionary spend, as well as catering for an older consumer who is more likely to stay home while SA remains in various stages of lockdown.

"So there has been a significant drop in foot count in most of these malls."

In contrast, shopping centres that cater more for lower-income shoppers’ daily needs close to public transport networks have held up relatively well.

Ward believes these centres are more insulated from the threat of online shopping, given that smaller baskets don’t justify the expense of delivery fees.

In addition, township malls have benefited from the lockdown as residents who would normally commute out of townships to work and shop were forced to spend more money in their local centres. She notes the trend is evident from results reported by the likes of Fairvest and Vukile.

For instance, in a recent pre-close update Vukile reported much stronger foot count growth in its rural, township and commuter centres than in its urban shopping centre portfolio.

There has also been a noticeable divergence in what has happened to retail property values. Ward refers to Liberty Two Degrees, for instance, which owns Joburg landmarks such as Sandton City and Eastgate. The valuation of the company’s portfolio decreased by 14.7% for the year to June. Similarly, Hyprop reported a 13.6% devaluation of its SA retail portfolio, while Mall of Africa owner Attacq’s net asset value fell 26% over the same time.

But in stark contrast, Fairvest’s portfolio had a valuation increase of 1% (like for like).

Ward singles out Fairvest as Metope’s top local retail-focused pick.

She says the investment case for Fairvest is supported by its small and focused portfolio — the company has no offshore exposure or off-balance sheet assets. "As such, small asset management initiatives are able to make significant differences and move the needle," she says.

Keillen Ndlovu, head of listed property at Stanlib, has a somewhat contrarian view and currently favours Hyprop.

He says Stanlib recently started "nibbling" on Hyprop shares again, after exiting the stock last year. He believes the company is oversold. Ndlovu’s other preferred value retail plays are Attacq and Vukile.

Attacq’s retail portfolio comprises eight shopping centres including Mall of Africa at Waterfall near Midrand, Eikestad Mall in Stellenbosch and MooiRivier Mall in Potchefstroom.

Attacq also owns Waterfall Corner, a small convenience centre anchored by a Woolies food store, Checkers and Clicks down the road from Mall of Africa, which has had strong trading density (sales per m²) growth during lockdown. Ndlovu believes trade at Attacq’s malls, which are mostly new, well-located assets, should recover as lockdown restrictions continue to be lifted.

Vukile, which has taken a lot of pain largely due its cross-currency interest rate swaps on the back of its exposure to the Spanish retail sector (about 50% of assets), also offers attractive recovery upside, he says.

Ndlovu adds: "All three companies are trading at a discount to NAV of between 75% and 80%. Also, none of these stocks is in breach of debt covenants and all are taking steps to address any such potential risk."