With SA's listed property index already down about 16.43% so far this year, any hopes that 2020 would see a significant recovery have been dashed.
After the South African listed property sector lost 30% of its value in 2018, 2019 saw further weakness in share prices.
Up until 2017, the listed property sector had been an investor favourite, outperforming other general equities, bonds and cash over most periods since 2003 and delivering double-digit total returns. Total return includes both income and capital growth.
Now because of a sell-off in general equities globally fuelled by fears the coronavirus is turning into a pandemic, and a barely growing local economy hardly helping property fundamentals, listed property is again one of the worst-performing sectors on the JSE.
Estienne de Klerk, CEO of the country's largest listed real estate counter, Growthpoint Properties, says there is no question SA's listed real-estate investment trusts (Reits) have been "under the whip" in the past three years, but points out it's been a difficult time in general for most industries, reflecting the pressure the local economy has been under.
De Klerk, who also chairs the South African Reit Association, says there have also been global events that have shocked markets, such as the coronavirus and trade disputes between the US and China.
These have all affected sentiment and the flows of capital as investors adopt a risk-off approach and move to the safety of cash and investments in the developed market.
However, these global factors notwithstanding, De Klerk acknowledges the South African economy is "probably the toughest I've ever experienced in my career", saying that from a local perspective it's "nearly a perfect storm".
"You have fundamental weakness like oversupply in offices and retail," he says.
The retail property oversupply over
the past five years has been driven by retailers themselves as no development goes ahead without their commitment, says
De Klerk.
"Retailers were chasing expansion . This has come back to bite them. When it hurts them they come back to landlords and ask for rental reductions and we have to live with that."
Another issue retailers and landlords are facing, over which they have no control, is the dramatic increase in rates and taxes, which significantly adds to "the cost of occupation".
De Klerk says rates and taxes have gone up 559% in the past 10 years while inflation has increased 220% over the same period, according to research conducted by MSCI/IPD.
The South Association Reit Association and its partner body the South African Property Owners Association, which represents the commercial property sector in SA, will be talking to the government to review the legislation in this regard.
"It's a bizarre scenario where tenants, in certain stores, are paying more per square metre for rates and taxes than they are for rent.
"That is putting pressure on the total cost of occupation and ultimately their ability to pay rent."
Office occupiers face the same pressure because of the dramatic rise in rates and taxes.
Another dynamic affecting the office market is the fact that corporate SA is shrinking along with the economy. As a result there is much less demand for space and vacancies have soared.
De Klerk says that at one stage, in November 2019, about 450,000m² of space out of the total 2-million square metres available in Sandton was vacant. This has since improved somewhat.
He says where there have been new office developments in nodes like Sandton and Rosebank, they have been predominantly driven by companies looking to save costs by benefiting from higher densities and greater energy efficiency.
He says companies aren't expanding their space, instead generally reducing it, especially as they cut their labour force in a struggling economy.
Of the three main commercial property sectors, industrial property seems to be in the strongest position, particularly modern warehousing catering for distribution needs, says De Klerk.
This is because distribution companies are also consolidating into new distribution centres to improve efficiency and reduce costs.
Ian Anderson, chief investment officer for Bridge Fund Managers, says not only are listed property stocks facing a low domestic growth outlook, but there is very little wiggle room for them because on average gearing levels are also high.
He says even though the national budget presented by finance minister Tito Mboweni last month was better than expected, with no nasty tax surprises for cash-strapped consumers, there was not enough in it to "move the needle" and change the outlook for retailers and the like.
And on top of all this landlords also have to deal with the threat of interrupted electricity supply courtesy of power utility Eskom, which is battling to keep the country's lights on.
Keillen Ndlovu, head of listed property at Stanlib, says the impact of Eskom is significant because landlords, particularly retail- centre owners, have to install generators, as well as maintain them and buy fuel for them.
"These are additional costs and it's difficult to pass on all these costs to tenants," says Ndlovu.
Even if a property owner has full backup power, customers still assume the shopping centre doesn't have power when there is a power cut or they simply don't want to go out in traffic and face the gridlock often caused by load-shedding, he says.
All of this has a serious impact on the listed property sector, of which just over 50% is made up of retail real estate.
Faith in sector pays dividends
With listed property in the doldrums and no apparent green shoots on the horizon, experts say one silver lining is that the sector is offering its best value in 16 years.
Also, though the economy is not playing ball, there are ways property companies and investors can position themselves to ride out the bad times.
With dividend yields of a lot of companies sitting at well above 12%, the sector has not looked this attractive from a valuation point of view since about 2004, says Ian Anderson, chief investment officer at Bridge Fund Managers.
Traditionally the sector has been popular with pensioners and other investors seeking regular dividend payouts. There is an inverse relationship between yields and pricing. When prices drop, yields rise.
In fact, says Anderson, on a comparable basis, the 12% the listed property sector is offering now is actually more attractive than the 12% of 2004. This is because in 2004, 100% of the sector was focused on South African property, and today about 30% of it is exposed to Europe, where there are now negative interest rates.
"If this is taken into account, a 12% forward yield in 2020 is offering significantly more relative value than it did in 2004," says Anderson.
Keillen Ndlovu, head of listed property at Stanlib, says he believes a mix of local and offshore property in a portfolio makes the most sense in this environment. He says there are also limited growth prospects in SA.
Another way for listed property counters to bolster their prospects is to reduce their loan-to-value ratios, which are on average at 40%, says Ndlovu.
Andrew Konig, CEO of Redefine Properties, the second-largest listed real estate company in SA, says: "You have to create your own green shoots. They are not going to come to you."
He says this requires property companies looking at their portfolios differently because growth simply won't come from acquisitions as no-one can issue equity given where share prices are — capital is just "too expensive".
"It means refreshing your current offering, redeveloping where buildings have reached the end of their existing use. In this environment where there are no users of space coming to market, you have to look at alternative uses of space," says Konig.
In the mall environment, this could entail looking to reconfigure space to offer flexible work stations or a college.
"Out-of-the-box thinking is required. You have to be flexible." — Nick Wilson
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