Amid high inflation and rising interest rates, SA’s listed property sector ended 2022 showing some recovery but economic uncertainty continues to weigh on the outlook for it.
In 2022, the sector benefited from a recovery in trading across various segments amid falling vacancies, with some companies reporting rising valuations on improvements in income, as well as stable capitalisation rates, according to Metope Investment Managers.
“After a period of consolidation, rightsizing of portfolios and debt reduction, the sector is now positioned to offer more stable cash flow with potential for growth recovery off a low base,” Metope CEO & portfolio manager Liliane Barnard told Business Day.
Barnard said the sector trades at a high discount to net asset value (NAV) of 35% relative to its long-term average of a 4% premium. “We expect any meaningful narrowing of the discount to NAV/yield differential once inflation and interest rates stabilise.”
Bongwa Mthembu, head of research at Meago Asset Managers, said though the first three quarters of 2022 were disappointing, the sector rallied 19.3% in the fourth quarter, ending the year a little lower.
Meago continues to see value in the sector. “However, the upward movement in NAV, significantly improved gearing levels and rising distributions have not been captured in the current market pricing,” Mthembu said.
Mvula Seroto, portfolio manager at Catalyst Fund Managers, said that based on earnings visibility due to the contractual nature of leases, the listed sector has potential to outperform in 2023.
The global economy is uncertain and economists are warning of recessionary risks in the short term, Seroto said. “Though uncertainty is likely to continue to drive volatility in asset prices locally and abroad, we expect total returns of 11%-14% per annum over the long term.”
Catalyst Fund Managers’ rolled one-year forward funds available for distribution (FAD) yield is about 10%, with 4% growth in distributions forecasted in the short term.
More certainty on inflation and interest rates would be positive for property stock prices in 2023, Rahgib Davids, equity analyst at M&G Investments, said. “So far this year, we have seen some derating reverse as investors began to anticipate an end to the interest rate-hiking cycle.”
Recessionary risks, a weakened consumer and persistent load-shedding does not bode well for property demand and rental growth, Davids said, “though we expect a decent dividend yield — earnings and net asset value growth will be hard to come by — and perhaps limited to a few well-positioned stocks”.
Mvula said savvy investors will shift focus to companies with defensive portfolios, strong management teams and sustainable capital structures. “We expect these companies to be better positioned to navigate the current environment of rising rates and inflation, which should lead to relative outperformance.”
Barnard expected the sector to deliver 8.5% dividend yield with stable to low-single digits in capital growth. The sector, down 16% at the end of the third quarter of 2022, ended the year with a marginal loss of gain of 0.5% on a total return basis reflecting an income return of 7.8% and 7.3% capital loses for the year.
She said recovery across various segments helped the sector’s performance. The troubled office sector shows signs of bottoming out with vacancies particularly in the Western Cape reducing.
Companies such as Growthpoint and Redefine are reporting increasing demand for quality modern offices with vacancy reductions across their portfolios as companies return to the office. Payout ratios are showing signs of stabilising — overall, the sector pays out about 90% of earnings. Companies with high gearing or short-term capital needs are opting to retain more cash.
Top performers
For the fourth quarter of 2022, the SA listed property index and the all-property index recorded total returns of 19.32% and 18.17% respectively. Signs of slowing inflation led to an improvement in investor sentiment and reratings in global bond yields, said Seroto.
Among the top performers were SA-focused real estate investment trusts (Reits) that recorded a recovery in fundamentals in 2022. These included Tshwane and Johannesburg CBD landlord Octodec Investments, diversified companies Emira Property Fund and Dipula Income Fund, Barnard said.
Davids said in 2022, the SA all-property index delivered a total return of -2%, underperforming bonds and equities that delivered 4.2% and 4.4% respectively. The listed property sector did resume dividend payments, giving shareholders a yield of 7%.
“The global market turbulence due to rising inflation and interest rates resulted in a 9% derating of the price, hence the negative total return.” Offshore-focused property stocks that historically benefited from very low interest rates and low inflation felt the most of this negative pricing.
JSE-listed companies Sirius Real Estate and Industrials Reit, which are both stocks exposed to the UK and European light industrial sectors, were sold off amid concern over energy prices and availability, Barnard said. UK-based landlords Capital & Counties and Hammerson fell sharply while SA’s only logistics specialist, Equites Property Fund, which had performed strongly throughout the pandemic, lost 19% as pressure on yields mounted.
“The performance of the last quarter of 2022 is encouraging, placing momentum behind the potential positive repricing of the SA listed sector in 2023,” Barnard said.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.