SA listed property: Total returns slow

Though the unprecedented run of the property sector has been more than ten years in the making, cracks are emerging in the sector’s total returns momentum.

The FTSE/JSE SA Listed Property (Sapy) Index, a benchmark for the performance of the sector, notched up a capital return of 8% (including dividends) for the 12 months to December 31 2015 – three times lower than the 2014 performance of 26.6%.

Despite the slowdown in the return, listed property was still the best performing asset class in 2015. Figures from Avior Capital Markets indicate that the sector comfortably outperformed the JSE All Share index, and cash, which delivered 5.1% and 6.5% for the year, respectively. Bonds posted a negative return of 3.6%.

Although listed property has been defensive and resilient to domestic and global macroeconomic headwinds for years, some market watchers expected the sector to produce considerably lower single-digit total returns.

Momentum Asset Management head of property Nesi Chetty says the volatility in the SA 10-year bond yield underpinned the sector’s performance. Listed property and bond yields generally trend together over the long term.

Bond yields in the last quarter of 2015 spiked from 8.5% to nearly 10.5% and the selloff in bond yields was prompted by the abrupt sacking of former finance minister Nhlanhla Nene, sparking policy uncertainty jitters among domestic and global investors.

Adrian Jardine, an equity analyst at Avior Capital Markets, shares a similar view: “In December, a credit downgrade, and a change in the finance minister that led to a breakdown in confidence in South African political leadership, resulted in a broad-based selloff in South African assets.” Prior to this, Jardine says the property sector had achieved a total return of 14% for the year.

You don’t have to look far to find the global factors impacting the sector: the US Federal Reserve raising the benchmark interest rate for the first time in nearly ten years and China’s expected economic growth slowdown on faltering manufacturing activity and low commodity prices are just two.

Property fundamentals locally, like inflation-beating dividend growth by companies (greater than 7%), a flurry of mergers and acquisitions and new listings boosted the sector. Last year there were seven new listings which include Indluplace Properties, New Frontier Properties, Lodestone Properties, International Hotel, Capital & Regional, Balwin Properties and Schroder Real Estate.

Best and worst performing stocks

On a global scale, SA underperformed all major Real estate investment trusts (Reits) on the back of the devaluation of the rand against the dollar, euro and pound, says Jardine.  During the period, the local unit weakened by 34% against the dollar, 19% to the euro and 29% to the pound.  The top performing Reit market was the UK, delivering total returns of 42%.  See full ranking below.

Source: Avior Capital Markets.

Locally, the top four performers over the past 12 months include mall ownerFortress Income Fund B-linked units, with a total return of 103%, followed by Romanian-focused New Europe Property Investments (62%), hotel owner Hospitality Property Fund B-linked units (50%) and rand-hedge player Rockcastle Global Real Estate Company (50%). Some of the worst performers include Delta International (-23%), Delta Property Fund (-21%) and Rebosis Property Fund (-20%).

Sustainability of return

The question is whether the sector will continue its total return momentum? Jardine says this depends on bond yield movements. He expects the Sapy total return to be in the mid- to low-single digits in 2016, driven by a 70 basis points rise in the long bond and 40 basis points narrowing of the yield spread. “While the yield spread is significantly wider than historical averages, demand for stable and predictable earnings streams in an increasingly uncertain economic environment will support the sector’s relative rating.”

Chetty says the sector will maintain some momentum as the distribution growth of property companies is still being maintained in real terms. He adds: “Rentals growth and vacancies are within acceptable levels. SA property companies have a more conservative balance sheet in this rate hiking cycle. Gearing is low, between 30 and 40% for most companies.”

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