Income chasers who bailed out of property stocks over the past two years on the back of dwindling dividends — or a complete halt of dividend payouts in some cases — are no doubt starting to ponder whether it’s time to re-enter the fray.
After all, the bulk of real estate investment trusts (Reits) that released results or trading updates in recent weeks have reported a noticeable recovery in earnings.
Many have bounced back stronger than foreseen from pandemic-related losses in income streams and property valuations. Rentals are starting to stabilise and demand for space is generally up. Vacancies are down — the office market being a noticeable exception.
And the companies that haven’t resumed dividends yet plan to do so sooner rather than later. What’s more, as Wayne McCurrie of FNB Wealth & Investments points out: “Property shares are cheap. The sector is still trading at a deep discount of an average 30% to NAV despite having recovered somewhat from its 2020 lows.’’
McCurrie says Reits offer good growth potential as well as inflation-linked dividend growth over the next two to three years. The sector is trading at an average dividend yield of about 8%.
It just depends on your risk profile. Bonds provide fairly low-risk, predictable returns, whereas listed property can deliver potentially bigger returns but at a higher risk
— Wayne McCurrie
That compares with the SA government’s 10-year bond yields of just more than 10%, an investment McCurrie says is also “incredibly” attractive. But, unlike listed property, bonds don’t offer potential for capital growth. “So it just depends on your risk profile. Bonds provide fairly low-risk, predictable returns, whereas listed property can deliver potentially bigger returns but at a higher risk,’’ he says.
So what are the biggest headwinds now facing listed property?
McCurrie doesn’t believe rising interest rates and stagflation fears on the back of the Russia-Ukraine war are major concerns. He says inflation should return to the 3%-4% level within the next 12-18 months while 80%-90% of property stocks’ debt is typically hedged at fixed interest rates. “So interest costs on debt repayments shouldn’t really be affected.’’
The key risk, he says, is the weak office market, given that most large Reits have exposure to this subsector. “Offices are likely to continue to suffer from rising vacancies and falling rentals. And who knows how the work-from-home story will eventually pan out’’.
Other analysts confirm that the listed property sector is poised for a recovery, but it won’t be a one-way bet. Independent global real estate analyst Garreth Elston cautions that the market is likely to remain volatile and under pressure for much of 2022. “I expect some form of stability and certain green shoots to emerge in early 2023, but investors will need to be patient,’’ he says.
However, Elston says the decline in property share prices has returned many counters to more realistic valuations and even to “good value” territory. He adds: “But this time around the sector’s progress is likely to be more measured and realistic than during previous recoveries.’’
Ridwaan Loonat, senior property analyst at Nedbank CIB, agrees that while the latest round of earnings releases and pre-close updates suggest green shoots are starting to emerge in some sectors, the office market clearly remains under pressure. “We do not expect to see a meaningful improvement in the short term,” he says.
Loonat believes counters with exposure to premium-grade logistics and value-focused retail assets such as rural and township shopping centres are likely to offer the best returns in the short term. “We think these assets will remain defensive from a valuation and performance perspective,’’ he says.
Just how choppy property share prices have become is clearly underscored by the big swings shown in the SA listed property index in the year to date. In the first half of 2022 alone the index lost 15%, clawed back 12% and then fell 10% again.
Earlier this week, the index was trading at just above 300 points, still about 32% below pre-pandemic levels and nearly 60% below the record peak reached at end-2018.
On a total return basis including dividends, the index has delivered -2.6% for the January-May period, according to Anchor Stockbrokers (see graph). That lags bonds and cash, at 1.79% and 1.16% respectively, over the same period, and is also below the -0.32% delivered by general equities (the JSE all share index).
Over a one-year period, however, listed property leads the pack, with a total return of 15.5%, followed by general equities’ 11%, bonds at 5.6% and cash at 4.1%. However, over five and 10 years listed property is again the worst performer among the four asset classes.
The difference between the best and the worst performing stocks in the year to date exceeds 30%
A deeper dive into the total returns delivered by individual property stocks shows the difference between the best and the worst performing stocks in the year to date exceeds 30% (see table).
It appears the winners were mostly supported by corporate action, or market expectations thereof, including a possible take-over/buyout of Emira and Irongate, and the collapse of the unpopular dual A and B share structure in the case of Fortress and Dipula.
Vukile’s share price has seemingly been driven by a solid performance from its SA shopping centre portfolio and access to a euro-based income stream via its Spanish retail interests.
The losers have been dogged by debt issues (Delta and Rebosis) or have large exposure to the office market (Delta) or to the struggling UK retail sector (Hammerson). Waterfall City developer Attacq hasn’t yet resumed dividends while German business park owner Sirius’s pullback is probably due to the strong run already shown in its share price in recent years.
Sirius, incidentally, is one of the few JSE-listed property stocks that has delivered uninterrupted dividend growth through the pandemic, if not the only one to have done so. The stocks that now rank on most property analysts’ buy lists include Attacq, Vukile, Growthpoint, MAS Real Estate, Sirius, Capital & Counties, and Nepi Rockcastle.
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