SA’s listed property sector is making a comeback in 2021 after its worst annual performance in history in 2020.
The all property index, which includes all the property stocks listed on the JSE, was up more than 17% year to date by the end of Friday. This was after it suffered a negative total return of 35.5% in 2020, including share price appreciation and dividends.
Jay Padayatchi, an executive director at Meago Asset Managers, says the market believes listed property offers value. “Some risks remain but this is largely mitigated as dividends resume and balance sheets are resized,” he says.
The sector has been enjoying momentum in 2021, partly helped by better-than-expected financial results released during the latest reporting season.
SA’s landlords, including listed real estate investment trusts (Reits), gave rental holidays and discounts to tenants during the coronavirus lockdown to lighten the financial squeeze many were experiencing.
Growthpoint Properties saw income earned by the V&A Waterfront in Cape Town — it is a half owner of the facility — plummet as tourists were unable to visit.
Covid-19 relief and a weak economy prompted Reits to reduce how much of their distributable income would be paid out each financial year.
Since the Reit dispensation was introduced into SA in 2013, SA’s property companies have paid 100% of their distributable income as dividends.
But various Reits have changed their payout ratio to between 90% and 95%, well above the required minimum of 75%. These Reits want to hold on to cash during the pandemic.
Keillen Ndlovu, head of listed property funds at Stanlib, says many investors have been happy to get a dividend, even if it is a reduced one.
Some Reits that released six-month financial results in 2021 did not declare an interim dividend. They still have the second six months of the financial year in which to declare a dividend and can then meet the 75% payout minimum.
But a handful of Reits committed to not paying any dividend at all for their 2020 financial year, using the excuse that they had failed to pass either a solvency or liquidity test.
One of the top five largest Reits, Redefine Properties, said it would not pay a dividend for its 2020 financial year to August, while diversified landlord Texton Property Fund said it would not pay a dividend for the year to June.
Ndlovu says property funds are trying to reduce their debt levels and strengthen their balance sheets this year. They are doing this through reducing their payout ratio to a minimum of 75% and through asset disposals and, to a far lesser extent, by raising equity.
One measure of balance sheet strength is loan to value (LTV), which is calculated by taking a company’s debt and dividing it by its asset base. Fund managers tend to prefer LTVs to be below 40% because above that can suggest some financial distress.
The LTV for the listed property sector sits at about 42% and most Reits are doing their best to take it to below 40%, according to Ndlovu.
“Reits are trying to fix their balance sheets. While there’s a need to focus also on interest cover ratio, the market seems to be fixated with just LTVs,” he says.
The interest cover ratio (ICR) is a debt and profitability ratio used to determine the ease with which a company can pay interest on its outstanding debt. The ratio may be calculated by dividing a company’s earnings before interest and taxes by its interest expense during a given period.
Most bank covenants require ICRs to be a minimum of two times cover. Ndlovu says an ICR of three times cover or above is considered to be strong.
The head of research at Meago, Ryan Eichstadt, says that while the listed property sector is having a better time in 2021 than in 2020, it continues to face headwinds brought on by the pandemic.
“Landlords are facing challenges, especially those who own non-dominant super and large regional retail centres and B- and C-grade decentralised office assets, which continue to suffer in the current operating environment,” Eichstadt says.
While South Africans are visiting malls again, they aren’t going to as many different shopping centres as they did in the past or visiting centres as often. Older graded offices are also battling to attract tenants on long leases.
Local property portfolios are facing deteriorating occupancy rates, negative rental reversions, decreasing rental escalations and continued pressure on property valuations, mainly because it is so difficult to predict what net property income growth will be this year.
But on a positive note there have been improved footfall rates, trading densities and collection rates after each lockdown stage.
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