Investors would have been better off putting their money in the bank than in listed property funds, with the sector having been outperformed by even cash so far in 2019.
The R600bn listed property sector, which in 2018 suffered a loss of 25.26%, its worst performance in more than 20 years, is struggling to gain traction, dragged down by weak consumer demand, lack of investment growth, declining rentals and high debt levels.
Investors were hopeful that the sector would recover in 2019 but so far it has been difficult. The listed property index has gained 0.22% and the all share 5.29%.
Bonds have returned 5.1% and cash 3%. There has not been a sudden bounce in share prices since the national elections on May 8.
Listed real estate investment trusts (Reits), which account for the vast majority of property stocks on the JSE, are selling assets and renegotiating loans as they try get their relative debt levels down.
Resilient sell-off
The sector was hammered in 2018 after a sudden sell-off of the shares of the four members of the Resilient group of companies — Resilient, Nepi Rockcastle, Fortress and Lighthouse Capital — which resulted in more than R100bn in value shaved off.
“Last year was all about the sell-down of the Resilient stable of companies, but this year the focus has shifted to debt levels. Loans-to-value are going up and there is a risk that cap rates will move up as physical property values fall due to declining rental growth and weak property fundamentals,” said Keillen Ndlovu, head of listed property funds at Stanlib.
He said investors were trying to establish if these weaknesses in listed property stocks were priced into the market yet.
Ndlovu said the sector’s loans-to-value were at 15-year highs but property companies could pull various levers to bring these down.
The companies could issue equity, but that was a challenge as most Reits’ share prices were trading at large discounts to net asset value. As their shares were trading below their physical asset values, this would be dilutive.
The companies could sell property assets and pay off debt, or hope that those assets would increase in value, but this was also a challenge given that property fundamentals were weak.
Ndlovu said one measure that suggested the sector could withstand weak economic conditions for longer and a recession was that many listed property stocks’ interest coverage ratios were healthy.
“The more, if not most important, measure is the interest coverage ratio [ICR]. An ICR basically highlights how easily a company can service the interest on its debt. Most companies’ or Reits’ ICRs are comfortably above two times,” he said.
Nesi Chetty, head of listed property at Momentum, said investors needed to recognise that commercial property was a “cyclical investment” and it would recover from this difficult period. He said the market was also awaiting who President Cyril Ramaphosa would appoint to cabinet in the next few days and how this could boost confidence.
“Over 10 years, listed property has beaten cash, so over the long term you need to hold property in your portfolio to achieve diversification and income,” he said.
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