With just over a month to go until 2021, the hopes of M&A in the property sector are fading.
Industry analysts have been holding out for deals all year, but so far it looks unlikely that a sale will happen.
The All Property Index, which includes all listed real estate companies, has achieved a total gain of 3.3% including share price appreciation and dividends since May 22.
“It's very difficult to sell assets in our market right now given the volatility around the share prices of listed property companies and perceptions around how much assets are worth and how much they will be worth next year. The market expects to see devaluations across the property sector,” said fund manager Stanlib's head of listed property funds, Keillen Ndlovu.
He expects the real estate investment trusts (Reits) to “try their best to sort out their debt challenges over the rest of 2020 and in 2021".
Darren Wilder, CEO of lower income customer-focused mall owner Fairvest, said the SA's R300bn listed real estate sector is unlikely to see much M&A activity before 2021.
Speaking in an interview with Business Day, Western Cape-based Wilder said his fund wasn't pressed to do deals even if it were performing well.
“Everyone is in a tough position, some have it worse than others. I think our decision to specialise, never to change strategy over many years, and never to wander offshore has helped us. This is why we have almost always met our targets. You probably won't see much activity across the sector during the rest of the year which is almost over,” Wilder said.
Wilder's Fairvest, which owns malls in townships and small towns with a focus on serving lower LSM shoppers, has been a gemstone among a bunch of pebbles as far as property companies have fared in 2020.
Over the past six months, its share price has climbed 15%, and its total return has been nearly 25%, according to data provided by Ahmed Motara, senior analyst at Stanlib.
Fairvest has been helped by the fact that most of its tenants mainly sold essential service products early in 2020, during the hard lockdown.
Fairvest paid out 100% of distributable earnings in its financial year to June, saying its assets had proved resilient during the Covid-19 pandemic, while some other Reits cut their payout ratios to about 90% or even as low as 75%. Reits are mandated to pay at least three-quarters of their earnings as dividends each financial year.
Fairvest's dividend per share for the year to June fell 3.4%, the group reported in September.
It was the first time its distributable earnings and dividend had fallen in eight years but had the fund chosen to pay out less than 100% of its earnings, its dividend could have risen.
“I think it's too soon for us as Fairvest to buy just any assets. Listed property has been through its worst year ever and things are still settling,” he said.
The group, which has 44 properties, valued at R3.49bn, is sitting with a vacancy factor of about 3%.
Numerous JSE-listed Reits want to sell assets to bring down their relative debt levels or loan-to-values (LTV) and to raise cash that they can hold in 2021 in case SA's economy weakens further and the Covid-19 pandemic worsens and forces the economy into a more stringent lockdown.
Fund managers prefer for LTV levels to sit at less than 35%, but now LTVs are averaging about 42%.
LTV measures the ratio of a company’s debt to its assets. After a 40% level is reached companies might start to show financial distress.
Ndlovu said there were three ways in which companies could lower their LTVs but none of them were that easy.
They could decrease payout ratios, which was the relative easiest method, sell assets or raise equity, which was the most difficult method, according to Ndlovu.
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