SA’s R322bn listed property sector’s December rally to claw back record losses in 2020 might not be enough to avert its worst annual returns on record.
Since December 1, the FTSE/JSE SA Listed Property Index (Sapy), which includes the 20 largest, most liquid real estate stocks on the JSE, has climbed 14.01% while the All Property Index, which includes all the listed property companies in the sector, has mustered 13.63% in December so far.
The Sapy closed 37.81% down year-to-date and the All Property Index closed 38.4% down year-to-date on Monday. These movements are share price returns.
Listed property has for the past two decades been a reliable performer because it gives regular income payouts that suit pension funds.
It went through a glorious run between 2010 and 2017, outperforming equities and bonds a number of times.
But the sector is still on track to suffer its worst performance in more than 20 years, with its worst performance before 2020 being in 2018, when the Sapy suffered a 25.26% total loss including dividends.
This unprecedented poor performance was off the back of the scandal around the Resilient stable of companies. There was a mass sell-off in property stocks in 2018 after allegations of market manipulation and using related-party deals to enhance dividends were made around Resilient, Fortress, Nepi Rockcastle and Greenbay Properties. Since then the four companies have been cleared of any wrongdoing.
Anchor Stockbrokers analyst Pranita Daya says a key aspect behind the rally in listed property is the announcement of a vaccine to fight Covid-19 made in early November.
“There is quite a direct correlation between the timing of that announcement and the market rally,” she said.
Head of listed property funds at Stanlib, Keillen Ndlovu, says the sector’s recovery was in line with local equity and global markets.
“The markets have reacted positively to the election of Joe Biden and progress on the Covid-19 vaccine. In addition, collection rates in SA are improving as well as foot count in retail centres,” he said.
Ryan Eichstadt, head of research at Meago Asset Managers, says the listed property sector has rerated significantly in December so far, outperforming all asset classes, including domestic equities, which did 3.96%, and bonds, which returned 0.84%.
“The strong performance of the sector was attributed mainly to the global ‘risk-on’ trade, driven by outcomes and thus certainty in the US elections, further expectation of a US fiscal stimulus package and positive news flow regarding vaccines,” he said.
But he said while recent listed property results and trading updates indicate improved collection rates for the period after the hard lockdown, other key indicators such as reversions, vacancies and escalations remained under pressure.
Ndlovu said property companies were not in breach of their debt covenants and “interest cover ratios are still good”.
The interest cover ratio measures the number of times a company can cover its current interest payment with its available earnings.
“They are working hard to avoid getting to uncomfortable levels with banks. From what we pick up, banks are likely to be accommodative but on a case-by-case basis,” he said.
Ndlovu said the risk of a second Covid-19 wave of infections was prevalent but recovery rates were high and SA being in summer encouraged people to go out.
The listed sector was trading at 40% below its net asset value, and hit a 50% discount, its highest one ever in November.
“Fundamentals are improving off a low base. We are seeing interest build up from equity and balanced funds allocating money to property investments,” he said.
Property funds are also trying to sell assets to raise cash and to lower their relative debt levels or loan-to-value (LTV).
LTV measures the ratio of a company’s debt and its assets. SA fund managers prefer property companies’ LTVs not to exceed the 35%-40% range. Many of these fund managers have criticised certain real estate investment trusts (Reits) for having LTVs well in excess of 40%.
The listed property sector’s average LTV is currently 42%.
Eichstadt said his team was cautious about the local trading and macroeconomic environment in the medium term.
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