So property’s down 20% this year ... is it a buyable bottom?

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INVESTMENT ANALYSIS

So property’s down 20% this year ... is it a buyable bottom?

Investor sentiment has been hurt by ugly allegations against Resilient, but surely the worm will turn

Alistair Anderson

JSE property investors who have suffered financial pain in 2018 following a slump of more than 20% in the South African listed property index (Sapy) are no doubt hoping for a recovery in share prices sooner rather than later.
However, property analysts are not expecting a marked improvement in investor sentiment until the Financial Sector Conduct Authority (FSCA) releases its findings into allegations of share price manipulation and insider-related trading leveled against the Resilient group.
Resilient Reit and its associated companies Fortress Reit, Nepi Rockcastle and Greenbay Properties have been hit by a sharp selloff following the release of various negative reports about the group earlier this year. That has had a negative knock-on effect on overall investor sentiment.
Appetite for listed property has been further diminished by the lower than expected dividend growth numbers that have been reported in the year to date by a number of property stocks due to high vacancies and lower rentals on lease renewals in a weak economy.The South African Property Owners’ Association’s latest office vacancy report for July reported a national office vacancy rate of 11.1% at the end of the second quarter, a slight improvement on 11.5 at the end of the first quarter.
As at December 2017, the national industrial vacancy rate as recorded by MSCI IPD was 3.3%, down from a revised 5.3% at December 31 2016, but up 100 basis points from December 2015.
Sapoa's retail trends report for June showed the national current retail sector vacancy rate was 4.1%. This was much higher than the long term average of 2.7%.
The numerous challenges faced by the sector have also meant that the property sector’s new listings boom has lost impetus. Between 2014 and 2016, there were 20 real estate listings on the JSE, and 13 between 2011 and 2013.
In 2017, there were two listings. One of these occurred through the merger of New Europe Property Investments and Rockcastle Global Real Estate and the other was the listing of Heriot. Heriot did not seek capital on listing.
The only new property company that has listed this year is developer McCormick group’s Exemplar, which owns a R5.5-billion rural shopping centre portfolio. However, this listing was not accompanied by a capital raise or initial public offering. The market was expecting at least another two or three new listings this year in the residential sector, all of which have been put on hold or canned, says Brian Azizollahoff, MD at Propertiq.Inkunzi Student Accommodation Fund, which was supposed to be the JSE’s first pure student housing play, was one of the proposed new listings that has not materialised. Analysts and fund managers have been waiting patiently for more rental housing portfolios to be brought to the market given the sector’s under-representation on the JSE. The last residential-focused fund to list on the JSE was Transcend Residential Property Fund, which joined the AltX in December 2016.
Residential focused property portfolios account for less than 3% of SA’s listed property sector. The general view is that when the economy improves, residential property should make up a far larger portion of listed real estate given the shortage of affordable housing across SA.
Garreth Elston, portfolio manager at Reitway Global, says bringing more specialised housing funds to the JSE will create more choice for investors. But Elston says investors will only put money into new listings if portfolios are of the right quality and brought to the market at the right price.
Craig Smith, head of research at Anchor Stockbrokers, has a similar view. “My sense is that there is a definite space for residential funds but the key to list a fund is to have liquidity and scale,” says Smith. He says a new rental housing portfolio would need to be worth at least R1-billion for fund managers to even consider investing in it. Even this may be too small as diversified property funds, which have listed on the JSE in the past four years have, on average, owned portfolios worth between R2-billion and R8-billion.Carel de Wit, CEO of Indluplace Properties, one of only two pure housing rental funds on the JSE, believes that more residential-focused property stocks will list over time. But he says listing a housing portfolio is costly and not everyone has the skills to run one. Many private residential property owners prefer to sell their stock to listed entities instead of listing their own vehicles.
While there may only be two specialised housing funds on the JSE, there are also a few diversified counters that have sizable investments in residential assets, including Octodec Investments and SA Corporate Real Estate.
Octodec owns about 9,500 rental apartments in the CBDs of Tshwane and Johannesburg, which contributed about 30.5% to Octodec’s rental income in the six months to February.
SA Corporate Real Estate owns R3.4-billion worth of residential property which is held in the African Housing Company and accounts for about a fifth of the diversified company’s assets.
Some believe it makes more sense from a risk perspective to have partial exposure to the housing market through a diversified portfolio.
Quintin Rossi, CEO of Cape-based property group Spear, which has a small residential exposure worth R100-million, says the company prefers to own stakes in residential property but not to be overexposed to the asset class.

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