Listed property has had a ripper of a year, outstripping even the most bullish recovery forecasts.
Share prices of several real estate investment trusts (Reits), domestic-focused ones in particular, have rebounded to five-year highs in recent months.
Attacq, Fortress Real Estate, Hyprop Investments, Emira Property Fund and Vukile Property Fund — most of which still generate the bulk of their earnings in South Africa — lead the pack year to date.
The worst performers are dominated by rand hedge stocks including Sirius Real Estate, Schroder and Shaftesbury Capital.
The only stock among the JSE’s 35-odd real estate counters that delivered a double-digit negative return year to date is struggling Fourways Mall owner Accelerate Property Fund.
Since end-October last year, when the sector was still languishing at multiyear lows, the South African listed property index (Sapy) has clocked up a total return of 52%.
That’s way ahead of bonds and general equities, which delivered 21% and 27% respectively over the same time.
But investors who dilly-dallied may have missed out. There is a view that property stocks have run too hard, too fast — though the Sapy is still trading more than 40% below its historic 2017/2018 highs.
Anchor Stockbrokers, for one, last month downgraded its recommendation on listed property from a buy to a hold. It seems some investors have already taken their profits, with the Sapy retracting about 5% since late September.
But is this just a temporary breather or the end of the long-awaited rerating?
Evan Robins, property fund manager at Old Mutual Investment Group, says the past year’s catch-up has been driven by something of a scramble among asset managers to rebalance their portfolios.
In recent years, many were overweight to bonds. However, the fall in bond yields has made property stocks a more attractive income-generating alternative.
He says renewed interest in listed property has been further fuelled by a recovery in Reit earnings, which typically drive valuation and share price increases.
But Robins reckons most generalist fund managers have already normalised their Reit exposure, which suggests the rally is probably over — for now, anyway.
He says further share price gains will depend on interest rates falling faster or further than predicted, or on South Africa achieving higher than forecast economic growth.
Ultimately, as Robins points out, the property sector’s longer-term fortunes depend on GDP growth returning to levels of 2%-plus.
Others are somewhat more bullish. Naeem Tilly, portfolio manager and head of research at Sesfikile Capital, says while one can’t expect a repeat of the more than 50% returns seen over the past year, the investment case for listed property remains intact.
“The sector now reflects fair value and could deliver about 13% total returns over the next 12 months. This is a respectable return underpinned by a healthy dividend yield.’’
Tilly believes a factor likely to continue to support share prices is a return to inflation-beating earnings growth.
He notes that most Reits are now seeing a steady recovery in demand for space across retail, office and industrial portfolios, which is starting to translate into rental and income growth.
Independent property analyst Keillen Ndlovu shares the sentiment. Though the earnings growth outlook for individual property counters still show divergent results for the 2024/2025 financial year, he expects most stocks to return to normalised (inflation-beating) growth by 2026.
For now, Lighthouse Properties, MAS, Attacq and Fortress lead the pack, with double-digit earnings growth forecasts for the 2024/2025 financial period.
Burstone, Growthpoint Properties, Octodec Investments and Dipula Income Fund are still in negative territory.
Rahgib Davids, portfolio manager at M&G Investments, cites the improved quality of listed property earnings as a reason why it is not too late for investors to re-enter the Reit sector.
That follows what Davids refers to as the sector’s “drastic transformation’’ from 2018 to 2023, during which time Reits fell out of favour.
He says the sector was forced during this period to adopt various survival measures. These included aggressive disposal programmes to reduce debt, more conservative cash-backed distribution policies and lower payout ratios, as well as large-scale investments into alternative energy and water sources to reduce dependence on unreliable municipal service delivery.
“The listed property sector has endured several years of headwinds, including negative rental reversions, rising vacancies, ballooning property expenses and higher interest rates.”
However, Davids believes the sector is now at the bottom of the earnings cycle and can look forward to a period of growth as headwinds begin to turn into tailwinds.
He adds that the Reit sector has finally managed to reclaim its former status as a reliable source of income with an inflation hedge proposition.
There’s further upside in the offing, he believes, referring to the sector trading at an 8% dividend yield (at an average 85% dividend payout ratio) and 0.7 times price-to-book ratio. Davids says: “Despite the strong rerating, post-rally valuations still look reasonable given that it came off a very low base.”
Still, given recent valuation uplifts, analysts agree that stock picking has become more important than ever. From a geographic perspective, Ndlovu sees a balanced mix of demand for local and offshore counters alike.
After several years of an outright preference for offshore stocks, he says local Reits are back in favour due to improved confidence in South Africa’s political and economic future.
Offshore regions that remain in vogue and offer above-market growth prospects include Central and Eastern Europe, as reflected by Nepi Rockcastle’s successful capital raise, and Emira’s recent venture into Poland.
Spain and Portugal are also top of mind for investors, where Lighthouse and Vukile continue to expand their footprints. The UK generally remains out of favour, says Ndlovu.
Davids prefers domestic mid-cap stocks with minimal office exposure and Reits with retail exposure to South Africa, Central and Eastern Europe, and Spain.
He believes stocks with exposure to niche sectors such as affordable housing and self-storage also offer value, as they stand to benefit from longer-term population growth and urbanisation.
Kanyane Matlou, senior portfolio manager for listed property at Terebinth Capital, favours the logistics sector on the back of ongoing supply chain optimisation by the country’s largest retailers and further expected growth in e-commerce.
He says demand for best-in-class warehousing and distribution centres outstrips supply, especially in the major metropolises where land scarcity and elevated construction costs have created stock shortages.
Declining interest rates, coupled with the two-pot pension withdrawal allowance, should also boost discretionary spending over the coming months. He says this will translate into rental uplift for retail landlords over time.
Matlou’s top logistics pick is Equites Property Fund, while his retail bet is Attacq, which owns Mall of Africa. “We believe Equites is best placed to capitalise on current market dynamics, given the high quality of its local portfolio, which is reflected by consistent near-zero vacancies, complemented by an astute management team.’’
Matlou cites Attacq’s high-quality and relatively “young” retail portfolio, especially at its Waterfall City precinct in Midrand, as an important differentiator.
Equites is also one of Sesfikile Capital’s top picks. Tilly says though Equites has been one of the poorer performers year to date, concerns about its policy to account for interest capitalised are exaggerated, as upcoming disposals and developments should see this become a smaller portion of earnings.
Negative reversions on long-dated leases and the dilutive impact of developments are also likely to be absorbed in the next six to 12 months, creating a solid platform for growth in future years, he says.
Tilly also likes Burstone, formerly known as Investec Property Fund. The company recently obtained shareholder support to dispose of an 80% stake in its Pan European Logistics business, which will result in its loan-to-value ratio, which has been a concern for many shareholders, declining substantially — from 46% to less than 35%.
Tilly says plans to grow Burstone’s third-party asset management business are encouraging, as it should start to contribute meaningfully to earnings growth in the next 24 months.
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