SA’s listed property sector sold assets valued at more than R6bn between end-June 2022 and August 2023, with more than R11bn of assets either sold but not yet transferred, held for sale or under negotiations, according to the latest company results and announcements.
Analysts say selling to reduce loan to values (LTVs) — a key measure of the financial health of a property company — remains the main reason for selling for many real estate investment trusts (Reits).
The average LTV for the sector is 38%, with market expectations for listed property funds below 40%.
Other reasons for sales include strengthening the balance sheet, funding new acquisitions, refurbishing existing assets, investing in backup power and selling noncore assets. Rising interest rates and the effects of the Covid-19 pandemic have influenced the pace and extent of these disposals.
Apart from Rebosis Property Fund, which is selling its assets as part of its business rescue plan, the sector is yet to see distressed selling, say analysts.
In the past four years, the listed property sector has been a net seller of assets on average, with asset sales exceeding purchases.
Buyers include unlisted funds, private equity, family offices and private investors, as well as institutional investors chasing premium assets and owner-occupiers that acquire smaller properties.
Across the industrial, office and retail sectors, assets have been selling, with more capital towards smaller assets such as community retail and those valued below R200m, with very little demand for offices, say analysts.
According to independent analyst Keillen Ndlovu, the disposal of assets has accelerated over the past two years. “Raising equity has become more challenging compared with the prepandemic period, and more so than before the listed property sector fell in 2018,” said Ndlovu.
Reduce debt
Ndlovu said Growthpoint has been actively selling assets — having sold R1.1bn during the nine months to end-March. It had R1.6bn awaiting transfer, with an additional R500m worth of assets approved for disposal.
Spear Reit achieved nearly R500m in asset sales with proceeds used to reduce debt and to reinvest into income-producing assets and developments.
Ndlovu said companies such as Spear and Vukile Property Fund have used sale proceeds to fund new acquisitions, while Fortress funds its development pipeline.
For the period ended February 2023, Equites Property Fund said it will dispose of core and noncore assets in SA and the UK valued at R3.3bn to strengthen its balance sheet and reduce debt. The company recently announced the sale of land and turnkey developments in the UK for R1.435bn, reducing LTV by 3% on a pro forma basis. Equites estimates that it will reach its target LTV ratio of about 35% by the end of February 2024.
Investec Property Fund aims to reduce its debt through asset sales from 42% to 39.9% in the short term and 35% in the medium term.
Scott Muzzell, a transactor for real estate investment banking at RMB, said debt repayment is still a key driver of asset disposals.
Reit share prices are trading at significant discounts to the underlying net asset value (NAV), hence the reluctance to issue equity at expensive prices. Due to increased borrowing costs, Reits look to disposals to unlock equity to fund growth and reduce debt.
“We have seen a significant improvement in the strength of the local balance sheets — as seen in LTV ratios — with disposal of noncore assets being the main reason for this improvement,” said Muzzell.
Muzzell said Redefine Properties is a good example. At the end of 2020 its LTV was 49.7%. The fund sold R5bn of assets during the 2021 financial year and R9.4bn during the 2022 financial year resulting in the LTV reducing to 40.2% at end-August 2022.
Rahgib Davids, portfolio manager at M&G Investments, said that in the normal course of business listed property companies sell assets as part of their capital recycling strategies. This includes selling mature, low-growth assets and reinvesting capital into accretive, high-growth opportunities.
“In the past five years, we have seen an acceleration in disposal efforts as companies sought to degear in the face of falling property values, declining rents and the rising cost of capital,” said Davids.
Davids said settling debt remains a top priority for most Reits, with Attacq having succeeded in this regard.
Over the past three years, Attacq has sold more than R4bn of assets, resulting in LTV reduction from 45% in June 2020 to pro forma of 23% once the deal with the Public Investment Corporation to fund a R2.8bn Waterfall City development pipeline is concluded later in 2023.
Craig Smith, head of research at Anchor Stockbrokers, said debt reduction is no longer the main reason for most listed funds, except those who may have breached or are close to breaching their lending covenants.
Ndlovu said the selling trend will continue at a measured pace as most Reits and property companies have enough headroom before they breach covenants with banks — either on LTV or interest cover ratios.
“However, in extreme cases where some property companies are breaching covenants, banks are willing to give temporary relief, as is the case with Accelerate Property Fund,” said Ndlovu.
For the period to end-March, Accelerate recorded a decline in its interest cover ratio of 1.8 times from 2.1 times in 2022 due to higher interest rates.
An interest cover ratio is the debt and profitability metric used to determine how easily a company can pay interest on its outstanding debt. An interest cover ratio below two times is seen as risky because this is likely to end in a breach of most bank covenants, but from about 2.5 times is considered an acceptable level for Reits.
Funders approved Accelerate’s application to temporarily reduce its overall interest cover ratio covenant levels to 1.7 times until the end of March.
Ndlovu said the market has not seen desperate selling yet, with prices having been more in line with book or carrying values — but, admittedly, some of the asset values have declined marginally over the years.
He said the sector is trading at about 36% below NAV with a big disconnect between listed property prices and physical property values. This suggests that the market believes that physical property values will fall due to the effects of higher interest rates and bond yields and lower earnings growth outlook.
“We are seeing a wider gap in the expectations of buyers and sellers in terms of the purchase price of assets, resulting in transactions being more difficult to conclude,” said Muzzell.
Recycle capital
However, he said most Reits are not forced sellers, enabling them to wait until they can get prices that will not have a detrimental effect on their NAVs. “The fact that sales are close to book value is evidence of realistic valuations in the current market.”
Muzzell said that until there is a significant narrowing in the discount to NAV and until Reits are better able to issue equity, there will be a need to recycle capital to redeploy into asset acquisitions and new strategic initiatives.
According to Smith, direct property transactional volumes are illiquid relative to the size of total market. Typically, properties that are sold have most likely experienced asset value writedowns over prior periods to get to a point where book values are closer to actual sales prices.
“Based on an illiquid direct property market, there is still a meaningful spread between what buyers are prepared to pay and what sellers think their assets are worth,” said Smith.
Smith said it makes sense for listed companies that have been trading at a deep discount for longer periods to continue to sell physical assets, provided they can achieve prices close to actual book values. “There are certain stocks with specific exposure and solid growth prospects, and yet discounts to NAV are not justified in our view.”
Smith said the sector has faced fund outflows, placing additional pressure on it. “If, or when, this trend stabilises, we may see a quick rerating of the sector with catalysts such as bond rerating, and improvement in sentiment with load-shedding becoming less of an issue.”
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