Property has been the worst performing asset class on the JSE for over three years now, but any long-term investor knows that real estate is cyclical. The property index has retreated around 40% from its highs in early 2018 and there are many Real-estate investment trusts (Reits) on the local bourse that are trading well-below net asset value and offering attractive dividend yields. This is as a result of many Reits in South Africa being over-leveraged and question marks surrounding property valuations. This is especially evident in property asset classes such as office and retail, both of which have been decimated as a result of Covid-19 and the ‘work from home’ trend that has emerged in 2020.
Since Reits are required to pay-out at least 75% of distributable earnings in dividends to shareholders, total return comprises capital gains and dividend income. Even the ‘blue-chip’, well managed, diversified South African Reits such as Growthpoint and Redefine have struggled to weather the storm.
Covid-19 has no doubt changed the demand and supply dynamics of the industry, so which property asset classes look well positioned to benefit in 2021?
The growth in e-commerce and resilience of the logistics industry has paved the way for distribution centres and warehouses to become the new ‘hot’ property class. These distribution centres and warehouses often have a number of favourable characteristics for landlords:
- single tenanted;
- lower operating costs;
- easier to manage;
- less capital intensive; and
- tenants tend not to relocate due to the expense of moving.
So, how can South African investors get exposure to this ‘hot’ sector the property market?
The only specialist logistics Reit on the JSE is Equites Property Fund. Equites has been an out-performer of the listed real estate market since listing in 2014. Dividend growth has increased by 9% or more each year since listing. Its defensive property portfolio comprises distribution centres and warehouses in South Africa and the UK. The UK comprises around 40% of its total property portfolio, providing investors with a rand-hedge component to the earnings profile of the company.
Equites have recently completed deals with Shoprite and Amazon, displaying management’s ability to innovate and move with the trends. Its tenants are generally ‘blue-chip’ clients with an average weighted lease expiry of a staggering 10.2 years, which exhibits the defensive nature of this operation.
Equites have a solid balance sheet, with a loan-to-value ratio of 26.2%, far below the industry average of 40%. The company has undrawn bank facilities of R1.4bn, meaning that they’ll be able to take advantage of any further opportunities that should arise given the depressed market conditions. Given the ever-growing rise of e-commerce, the once ‘boring’ distribution centres and warehouses may become an asset class that creates a lot of excitement in 2021.
