If you bought Vukile Property Fund, MAS Real Estate, Industrials Reit (formerly Stenprop), Emira Property Fund, Hyprop Investments, Sirius Real Estate or Attacq last year, you’re in the pound seats.
Each stock notched up capital growth of at least 60% over the period. Not too shabby, especially as these property counters also either resumed or continued paying dividends, Attacq being the only exception.
Even the sector’s worst performers (with the exception of Fortress) delivered double-digit share price growth (see graph).
Listed property’s rebound comes on the back of a more normalised earnings outlook. It seems the sector is now through the worst, with balance sheets and cash flows by and large stabilised after huge pandemic-related income losses in 2020.
Last year’s rerating has noticeably narrowed the discount to NAV at which real estate investment trusts (Reits) have traded in recent years, from an average 50% 18 months ago to 13%, according to Stanlib figures. Still, the SA listed property index remains about 50% below its end-2017 peaks. So investors still have time to cash in on further recovery upside.
But analysts warn it’s not necessarily a one-way bet: "For most counters, I don’t believe earnings will recover to pre-Covid levels in 2022," says Naeem Tilly, portfolio manager and head of research at Sesfikile Capital. He cites significantly lower rentals in the past 24 months as a key reason.
Share price movement in 2021
Tilly says earnings could also be negatively affected by degearing activities and gradually rising interest rates. Lingering uncertainty over how the pandemic will play out this year remains a concern as well.
Nonetheless, he expects overall earnings growth — which typically equates to dividend growth — to be in the low to mid-single digits this year as reasonable growth is still likely to come from some offshore and specialist SA-focused counters.
Ahmed Motara, portfolio manager at Stanlib, has pencilled in a 12% total return for the sector for 2022. He expects average distributable income (or dividend) growth to clock in at 3%.
Kelly Ward, portfolio manager and head of research at Metope Investment Managers, believes the sector still offers value despite last year’s rerating: "Investors can still enter the sector at fair dividend yields of 6%-8%, with payouts set to grow again this year, albeit off the lower base set in 2020 and 2021. That will pave the way for further capital growth, providing a robust total return."
The key question for investors is: which individual property stocks are likely to outperform this year?
Motara’s top picks for 2022 are Redefine Properties, Nepi Rockcastle, Fairvest and Vukile. He says: "We believe Redefine now has a much stronger balance sheet than was the case in 2020/2021. Debt levels are not a material concern, the portfolio is more focused on specific geographies (SA and Poland), and nonperforming assets have been sold." Motara is also positive about Redefine’s planned acquisition of Polish mall owner EPP, which will result in EPP being delisted and Redefine gaining control of nearly all EPP’s underlying investments.
In terms of East European-focused Nepi Rockcastle, Motara believes the top 40 index constituent is a good diversifier for investors who are overly exposed to rand-denominated income streams. In addition to having significant liquidity, the stock has a strong retail portfolio that performed well in 2021. Nearly 100% of its gross lettable area is trading, with a strong rebound evident in tenant sales and foot count. Nepi Rockcastle now trades at a 9% discount to NAV and a 6.5% yield.
Fairvest, whose SA-based portfolio of community centres caters mainly for low-to middle-income shoppers, continues to be a standout defensive performer. Motara also sees potential synergies and benefits from the proposed merger with Arrowhead. The counter offers an attractive yield of 7%, with dividends expected to grow at 4%-5% in 2022 (before the Arrowhead merger).
Despite last year’s strong rally, Motara reckons retail-focused Vukile, which has about a 50/50 asset split between SA and Spain, is still undervalued. "We believe concerns about debt levels, asset yields and Spanish valuations are misplaced, with the operational performance from the Spanish and SA assets reflecting a level of strength that the market hasn’t yet fully valued," he says. "The simplified balance sheet debt structure, high rent collection levels, positive leasing metrics and GDP growth forecast for Spain suggest there is potentially more upside for this stock."
Tilly agrees that Redefine and Fairvest are likely to outperform in 2022. He also has Octodec Investments on his stock pick list for the year. Octodec owns a large rental housing portfolio, mostly located in the inner cities of Pretoria and Joburg. Its retail assets include Joburg’s Killarney Mall.
Tilly notes that Redefine counts as one of the JSE’s most successful Reits in terms of repairing its balance sheet, with its loan-to-value falling from 47.9% in August 2020 to 41.6% now.
"The company has also impressed with the way it has managed its local portfolio against a challenging economic backdrop," Tilly says. Redefine is trading at a yield of 13.3% and a discount to NAV of 39%.
Octodec’s share price still languishes at 46% below pre-Covid levels despite earnings troughing only 30% below 2019 levels.
"We see potential upside as Octodec reduces its residential vacancies, driven by a normalisation in student uptake and employment in the inner-city markets. This in turn will fuel a recovery in its retail portfolio in these areas, which remains a key market for retailers," says Tilly. Octodec offers a 17% yield and a 65% discount to NAV.
Ward’s stock picks include Nepi Rockcastle, MAS and Resilient Reit. "We still favour Central and East European geographies," she says. "Despite Covid seemingly having led to longer and more lockdowns in that region, we believe the fundamentals remain strong, and we think economic growth will outpace that of SA."
Referring to Nepi Rockcastle, Ward says despite a new CEO and CFO being appointed to take up their posts in February, the company’s portfolio of shopping centres, which is spread among nine countries, will continue to perform, and collection and occupancy rates will hold up well despite trading restrictions.
Similarly, MAS is expected to continue to benefit from the region’s strong economic and consumption growth outlook — the company owns a portfolio of more than 20 retail centres, primarily in Romania. Ward says MAS’s foray into residential developments will provide an untapped market, which she believes should create significant value for shareholders.
Resilient, Ward’s top SA-focused pick for 2022, owns a portfolio of regional malls that dominate their catchment areas, mostly in nonmetro and rural regions across SA. The stock also offers offshore exposure indirectly through stakes in Western Europe-focused Lighthouse Capital and Nepi Rockcastle, as well as directly via a stake in a portfolio of French shopping centres. MAS trades at a 9% discount to NAV and a 6% yield, while Resilient is one of the few companies that trades at a premium to NAV (20%), albeit based on June 2021 valuations. Resilient’s yield sits at 7.76%.
Howard Penny, research analyst at Anchor Stockbrokers, also likes MAS because of the value unlock that is expected to flow to shareholders over the next few years as the company rolls out its East European development pipeline. He’s keeping Lighthouse, Stor-Age (the only self-storage company on the JSE), specialist logistics operator Equites and Nepi Rockcastle on his radar. "These counters all lagged in 2021 and should deliver strong earnings growth in their next set of results," says Penny.
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