Despite the mini-rally in share prices since early November, long-suffering property investors are no doubt still reeling from last year’s huge knock of nearly 35%. This is the sector’s worst annual total return performance on record.
Problem is, it was the third consecutive year that real estate investment trusts (Reits) underperformed general equities, bonds and cash.
In the six months to September alone. about R360bn was wiped off the market cap of the sector’s 34 counters, according to the SA Reit Association.
And despite a strong rebound in the last two months of 2020, the SA listed property index (Sapy) is still trading at an average discount of about 50% to NAV.
Property investors were dealt a double blow last year: capital erosion, accompanied by severe dividend cuts. Reits had little choice in the matter as most suffered heavy income losses on the back of rental relief packages extended to struggling tenants during lockdown.
The question now is: does the sector face another year of value destruction and, if so, is it time to bail out of property stocks if you haven’t done so already? Or are Reits finally poised for a sustainable recovery in 2021?
Analysts believe the latter is the most likely scenario. In fact, some general equity fund managers and value chasers who traditionally shied away from listed property — including Allan Gray and PSG – have already started to selectively add Reit shares to their portfolios. That no doubt partially explains the rebound seen in property share prices since early November.
PSG Asset Management fund manager Dirk Jooste says it has largely avoided listed property until now because of well-founded, pre-Covid concerns about a growing oversupply of retail and office space, above-inflation increases in rates, taxes and electricity tariffs, and rising debt levels — all of which have eroded landlords’ profit margins over the past few years.
Once the pandemic hit, existing concerns were simply amplified, he says.
The subsequent sharp drop in rental income during lockdown further called into question the historic ability of property stocks to deliver a fairly predictable bond-like income stream.
Hence the deep distress in property share prices, he notes.
However, Jooste believes it’s time for investors to take another look at the sector’s value proposition. As he puts it: "Our interest is piqued when extremely negative narratives become conventionally accepted wisdom."
He adds: "Though the concerns dogging listed property are real, the negative sentiment implied by current share prices and wide discounts to NAV has been overdone and doesn’t reflect fair valuations."
Anchor Capital fund manager Glen Baker shares a similar view. He says: "It would be easy to dwell on the negative statistics that appear when analysing the performance of the Sapy over the past three years. But the price action that occurred in the fourth quarter of 2020 is a key indicator of what potential prospects there are for investors."
Baker believes the 33.5% return delivered by the Sapy in the last two months of 2020 was partly supported by reports of consumers and tenants returning to malls and offices in the fourth quarter — albeit at far from pre-Covid "normalised" levels.
Positive sentiment was further fuelled by the Treasury’s decision not to relax the regulatory requirements that compel Reits to pay out 75% of distributable earnings to shareholders within six months of their financial year-end.
The Treasury’s ruling is of key importance, especially for income-dependent investors, as it means dividends will continue to flow into the hands of shareholders — even if payout ratios reduce.
Most Reits have already dropped payout ratios from the usual 100% of distributable income to between 75% and 90%.
However, despite more certainty on the dividend front, Baker warns that share-price movements are likely to remain volatile.
"In our view the recovery will not be V-shaped and the re-introduction of harder lockdown rules means that the best outcome for the next 6-12 months is a muddle-through result."
Anchor Capital’s base case forecast is a total return of a fairly muted 8.6% for the year as a whole.
But Baker notes: "As evidenced in the back end of 2020, there can be fairly extreme volatility and a wide range of outcomes is possible."
Mvula Seroto, portfolio manager at Catalyst Fund Managers, agrees that this year’s performance won’t be a one-way bet.
He expects continued pressure on rental collection levels, higher vacancies and elevated gearing positions going into 2021, which will affect actual dividends declared.
Seroto urges investors not to fixate on the short-term postponements of dividends. Instead of being focused on short-term yields, investors should adopt a long-term total-return focus.
He says: "Notwithstanding the rebound in the last quarter of 2020, our five-year annualised total-return forecast for the sector remains attractive and ranges between 14% and 17%."
Mvula adds: "We expect property companies to get through this crisis, though not to pre-Covid levels. There will be some permanent value destruction.
"However, the sector shows good long-term value for patient investors. We expect dividends to come back for most of the companies that chose to postpone or defer dividends."
Nedbank CIB analyst Ridwaan Loonat is forecasting a compound annual total return of 12.5% for the next three years, the bulk of which will be underpinned by income.
Loonat says the key upshot of the Treasury’s recent decision that Reits need to maintain a minimum payout ratio of 75% within six months of year-end is that the sector’s traditional attraction as a yield play remains intact. Says Loonat: "You may see companies not declaring an interim dividend but investors can be confident of receiving a dividend at full year, be it in scrip or cash.’’
Nesi Chetty, senior listed property fund manager at Stanlib, expects property companies to resume normal dividend payments as early as the end of the first quarter. In fact, he says it’s likely that companies that reported full year results up to September last year could report double digit growth in distributions this year, albeit off a low base.
"Retail-focused and diversified counters could see a big rebound in distribution growth over the next 12 months on the back of rental discounts and deferments taken during 2020,’’ Chetty notes.
Logistics, self-storage and retail property companies that cater to lower-income shoppers, whose business models and rental collection levels haven’t been severely hit during Covid-lockdowns, will probably post low single-digit dividend growth this year.
Chetty says some companies could take two to three years to get back to absolute pre-Covid distribution levels.
Capital gains will be dependent on the re-rating of property relative to bond yields and how quickly SA can roll out a vaccine.
Weak GDP growth, as well as lingering Eskom/load-shedding issues, will probably continue to plague all JSE-listed companies.
However, Chetty believes property stocks have already priced-in most of the bad news.
He expects the Sapy to deliver a total return of a fairly decent 13% for 2021, made up of an 8% dividend yield and 5% capital growth.
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