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South Africa’s listed property sector performed badly in 2020, with many tenants being unable to operate – with a knock-on effect on landlords’ earnings.
The Covid-19 national lockdown is a significant factor, bringing business activity to a halt for a period. According to Liliane Barnard Metope CEO, the listed property industry provided nearly R1.8bn rental support bailouts for tenants, mostly SMEs.
“The brunt of this bailout was ultimately borne by shareholders/investors/man on the street and pension funds invested in listed property. Dividends to shareholders were mostly slashed by half if paid, or deferred as long as regulatory possible to ensure liquidity remains in the business in these uncertain times.”
However, she thinks the underlying operations of listed companies are much more robust than the market gives it credit for.
“Despite cost pressures such as rising municipal increases these companies face, recent results show resilience.”
Listed property valuations are under pressure and still have to adjust to the post-Covid world. “Lower interest rates will support valuations as funding acquisitions is accretive with a positive yield spread for the first time in decades.”
Importantly, listed companies are able to more than comfortably service their debt ratios and meet their Interest Covenant Ratios.
“They will do so with a reasonable margin, and at this point, there are no large liquidity crunches foreseen on the horizon. We think listed property shares trading at a 30% discount to net asset values remains oversold,” says Barnard.
Top performing sectors
Segments such as logistics, storage and sectors of the residential market performed way better in 2020 compared to offices and retail.
“As long as the market continues to favour a risk-off approach, we expect the logistics sector to continue to perform solidly. However, this would be at relatively more expensive entry points,” says Barnard.
Furthermore, recovery in the harder hit shares as fears of highly dilutive capital raises dissipates is expected. Listed property companies will continue to deliver on rental collections and distributions payments return, she points out.
Listed property returns
Like any investment, timing is everything she says. If you invested in listed property in January 2020, your investment would be down 33%. However, if you invested in November 2020, you would be posting at 20% capital return, she says.
“We strongly believe there is value to be had in the sector. Pricing rebounds can happen swiftly and sharply on any positive news as seen over the past two months.”
Metope believes it is crucial to remain invested in order to take advantage of these small wins. Investors can also position themselves for the dividend flow that is set to come in 2021 and beyond.
“A longer-term investment horizon is important as uncertainty remains. Patient investors will be rewarded with a relatively high income yield and eventual capital growth,” says Barnard.
Is the sector still a good investment?
As seen with the lockdown, the property sector is significantly impacted if tenants are unable to meet their obligations.
Barnard says uncertainty remains as to how the pandemic plays out, listed property fundamentals are not encouraging for the foreseeable future. “This is given expectations of lower market rentals, higher vacancies and the impact of work-from-home and a post-Covid world is fully played out.”
She explains that the full effect of weaker fundamentals filters through property portfolios over time. This as the bulk of the portfolios grow with the annual escalations of around 6-7% per annum, mitigating the weakness to some extent.
“Companies with operational platforms that enable directly engagement with tenants will fare better.”
Barnard expects an improvement in distributable income as tenants recover and landlords are able to collect on deferred rental. This would be possible if SA avoids a severe lockdown, and navigates through any Covid-19 waves while waiting for vaccine distribution.
“Over time as companies’ liquidity positions improve they are able to increase their pay-out ratios from 75% closer to 100%. This provides a further boost to distributions, and lower interest rates also provide some relief.”
2021 sector expectations
Recovery is expected in 2021 as risks experienced in 2020 can now be quantified or calculated to some degree. However, while news of a vaccine is encouraging, a Biden presidency should see more civility and predictability in US politics.
President Cyril Ramaphosa will have a further year in which to solidify the small gains made in 2020, says Barnard. These will include on issues of power stability and corruption among others.
“Uncertainty will remain for a while longer as we navigate second, and possibly third Covid waves. These will have varying levels of lockdowns and economic stress, dampening/stretching out our economic recovery.”
However, she says record low interest rates and substantial economic stimulus projects should provide an increased global appetite for risk. Emerging markets will benefit from this, and listed property sector trading at historic yield of circa 8%,” she adds.
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