SA’s R400bn listed property sector has shifted its emphasis from being a regular dividend player to preserving cash because of the uncertainties caused by the Covid-19 pandemic.
The pandemic means that many property tenants have been unable to operate unless they are involved in essential services. Some tenants are applying for relief but delays in rental payments have left commercial property owners with holes in their cashflow.
This has placed pressure on investors, many of them pensioners who rely on real estate investment trusts (Reits) to pay them income. Reits by definition must pay a minimum of 75% of their distributable income as dividends. Those dividends are then taxed in the hands of shareholders and not at a company level.
SA Reits have typically paid 100% of their distributable income since Reit dispensation was introduced to the sector at the end of 2013.
Reits have been withdrawing their dividend guidance over the past few months. At the end of 2019, fund managers said they expect dividend growth to average 0%-2%. This was because of a weak economy and pressure on the funds to finance mounting debt.
Head of listed property funds at Stanlib, Keillen Ndlovu, said it was difficult to quantify how much in dividends property funds would not pay in their 2020 financial year.
“It’s difficult to quantify as we are in a fluid situation given the uncertainty around the rentals as well as payments. What we can say is the sector on average is cutting pay-out ratios and postponing paying dividends but this is more common for Reits with stretched balance sheets,” he said.
“The sector is now moving from its tradition as an income play to a capital play, in the short to medium term until things normalise. This is disappointing for income-focused investors,” Ndlovu said.
Redefine Properties, Polish group EPP and Hyprop Investments have delayed their interim dividend payments. Vukile Property Fund has made no commitment concerning the payment of the next dividend. However, German-based Sirius Real Estate and UK-based Atlantic Leaf Properties are both paying dividends.
Only a handful of CEOs in the sector have announced they will take salary cuts. Melt Hamman, CEO of Attacq, which owns Mall of Africa and other assets in the Waterfall Estate node, announced in April he would reduce his monthly fixed remuneration by 33.3% for the period April 1 to June 30.
Hamman has also sacrificed any potential increases and annual bonus payments for the 2020 calendar year.
Nldovu said the effects of Covid-19 on commercial property will be gradual. There could be spikes in office vacancies if more people choose to work from home or if businesses go under.
But many leases are long term in nature, with some as long as 10 years.
Given the tough circumstances, instead of losing a tenant, “we are more likely to see some leases being reviewed even before they expire and the terms changed to accommodate tenants. In this environment, landlords have to do the best they can to nurse ailing tenants,” Ndlovu said.
“It costs more to lose a tenant than to retain one, even at a lower rent. There’s no demand for vacant space at the moment. Even if there was, there’s an opportunity cost of missed rentals when the property is vacant, expenses like security, rates and taxes will still be incurred. When you find a tenant, possibly at a lower rent, there are broker commissions as well as tenant installation allowances,” he said.
Meanwhile, Nedbank’s property finance division said it was confident its listed property clients would be able to manage their debt positions. Nedbank has the largest property loan book among SA’s banks.
“The majority of its customers have access to sufficient existing liquidity to manage through three to six months of a highly stressed environment before requiring any form of additional cash-flow relief,” Gary Garrett, managing executive for Nedbank Property Finance said.
His team was working with clients experiencing short-term liquidity pressure from the pandemic, he said. They were offering solutions on a case-by-case basis, including capital-repayment holidays and short-term liquidity facilities.
The lender would condone covenant breaches only if real-estate businesses were servicing their debt obligations, Garrett said.
None of Nedbank’s listed customers have asked for specific relief related to Covid-19, he said.
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