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The listed property sector has enjoyed historic high returns over the last five to ten years, with high valuations on some companies helping to drive the sector. But high valuation comes with perfection priced in – and thus little tolerance for shocks within the sector. Accounting policy and crossholding controversies in the Resilient stable therefore came as a significant blow to the sector.
“Sentiment on the sector has changed and we are all getting tarred with the same brush,” says Norbert Sasse, group CEO of Growthpoint Properties, South Africa’s largest and most liquid real estate investment trust (REIT).
Keillen Ndlovu, head of listed property funds at Stanlib, confirms that there is currently investor hesitation in listed property “given recent volatility mainly driven by events surrounding the Resilient stable”. Added to this, there are weak fundamentals across all sectors, but more so in the office and retail space.
Wilhelm Nauta, investment director at Hyprop Investments, explains that “there is a lot less money going into the listed property sector and a lot more withdrawals”.
Investor focus has also changed. Once predominantly income and distribution focused, net asset value (NAV) measure is now being given equal attention, says Ndlovu. “The market is focusing more on cleaner, sustainable core property fundamentals, so quality of earnings are important as well as where companies are trading versus NAV,” he says.
“Investors were looking at annuity income funds to beat inflation. Now I think it’s shifted and they are also starting to look more closely at the underlying value of companies,” says outgoing Hyprop CEO Pieter Prinsloo*.
Many property stocks are now trading below NAV, perhaps representative of a market that Ndlovu says is grappling with valuations. “With the blend of local and offshore assets, the market is struggling to value the listed property sector. It was simple when it was just local; it was a yield and there was strong correlation between bond yields and property yields. But with the offshore element, that relationship is not as strong.”
Given this environment, results and growth guidances from the listed property sector are somewhat muted in comparison to years past.
“The SA economy continues to struggle, as it has for six years in a row,” says Sasse. “But the market at the moment is the toughest it has ever been, certainly in my 15-year tenure with Growthpoint. Any growth is good growth in this market.”
Listed property performance
Growthpoint Properties
Growthpoint Properties continued its 15-year record of dividend growth, announcing distribution growth of 6.5% per share for its full year to 30 June 2018. Positive performance is mainly attributed to strong contributions from its investments in Central and Eastern Europe (CEE) and the V&A Waterfront.
A significant milestone was the issue of its inaugural €350m Eurobond, which establishes Growthpoint as an issuer in the global debt markets. “It puts us on track to tap those markets for funding to support our international strategy,” says Sasse.
Growthpoint’s diversified portfolio consists of 512 properties, 454 of them across SA. Other investments include the ones in Australia, Romania and Poland. Group property assets increased 8.7% to R132.9bn with most of the growth coming from offshore. Offshore exposure, now 27.7%, is closing in on its 2020 target of 30%. Gearing remains conservative at 35.2% and Growthpoint’s strong interest cover ratio improved from 3.5 times to 3.7 times.
The REIT disposed of 30 assets in its SA portfolio valued around R4bn, and is in advanced negotiations to dispose of 58 properties for R5.8bn-odd to a BEE consortium.
According to Ndlovu, Growthpoint’s 4.5% growth outlook for the 2019 financial year was slightly below market expectations. But Sasse’s description of the second six months of the year as “the toughest environment faced” is perhaps reason enough for this.
Hyprop Investments
This retail specialist REIT, whose assets total R38.3bn, operates a portfolio of shopping centres in SA, sub-Saharan Africa and South-Eastern Europe (SEE). It delivered 8.8% for its full-year to 30 June 2018 and forecasts cautious dividend growth for the year ahead of 5% to 7%. “The outlook for the 2019 financial year is worse than expected, however, Hyprop typically under-promises and over-delivers,” says Wynand Smit, real estate analyst at Anchor Stockbrokers. Despite the challenging SA retail landscape, vacancies declined from 2.4% to 1.9%. But Hyprop is facing headwinds with Edcon downsizing their footprint, says Smit.
SEE acquisitions amounted to €439m. The SEE portfolio, valued at €740m, is held via a 60% interest in UK-based Hystead Limited and includes six centres located in capital cities in Serbia, Montenegro, Macedonia, Bulgaria and Croatia.
“We have a wide offshore mandate and will look at CEE, but so far the most value we see is in SEE countries,” says Prinsloo. Sub-Saharan Africa exposure comprises 12%.
Attacq
Despite revising its growth guidance downward, Waterfall node developer Attacq’s growth forecast is still better than most.
Revising its prior guidance of 20% dividend growth, Attacq, which converted from a capital growth company to a REIT in May, forecasts distribution growth of between 7.5% and 9.5% for the 2019 financial year and between 13% and 15% for 2020.
The cut comes on the back of MAS Real Estate revising its forecast from 30% to 15%. Attacq’s 22.8% shareholding in MAS accounts for 10.8% of assets and provides Attacq with exposure to Western Europe and CEE.
Ndlovu is pleased Attacq is not using reserves to bolster distributions as he says this can create a high base that might become difficult to sustain. “We like cleaner, sustainable and simpler recurring income as opposed to distributions coming out of reserves.”
Attacq declared a maiden distribution of 74c/share for the year ended 30 June 2018. The SA portfolio, 72.5% of total assets, accounts for R21.1bn of Attacq’s R29bn total asset value.
Ellipse in Waterfall City will be the company’s first residential development. Comprising four towers and around 550 sectional title units developed in two phases, its target market is similar to the R33 000/m2 to R36 000/m2 Rosebank market. The two-tower, 250-unit phase one development has a pre-sales target of 70%, CEO Melt Hamman tells finweek.
Non-core office assets will be sold to reduce debt and improve Attacq’s 1.6 interest cover ratio. Also on the disposal list are its Rest of Africa (outside SA) assets that account for 3.8% of the portfolio.
Fairvest Property Holdings
This R2.99bn retail-focused REIT emerged as the top-performing SA REIT for the 12 months ended 30 June, with a 17.9% annualised total return to shareholders.
The small, high-growth property fund concentrates on the lower LSM market. Its focus is on retail assets weighted toward non-metropolitan and rural shopping centres, and convenience and community shopping centres. This unique focus brought a 9.91% increase in distribution, 11.7% property income growth, 4.4% increase in NAV and low vacancies of 3.5%, post the period 2.6%.
“We will keep this business simple,” says CEO Darren Wilder. “We are not going offshore, or into Africa.” Despite economic headwinds, Fairvest is confident of achieving distribution growth of between 8% and 10% for the 2019 financial year.
Offshore companies listed on the JSE
MAS Real Estate Inc.
MAS’s over €1bn portfolio comprises predominantly retail assets in Western Europe and CEE. MAS reported 30% distribution growth for the year ended June 2018, but revised its 30% forward guidance to a more prudent 15% as it does not intend subsidising the 2019 distribution from reserves.
The revised guidance constitutes a cleaner number going forward, says Ndlovu. Highlights for the period include a 7% increase in NAV/share, 32% increase in income-generating property and 35% increase in net rental income.
The bulk of MAS’s €44.9m rental income stems from Germany (36%) and the UK (24%), followed by Bulgaria (14%), Romania (13%), Poland (10%) and Switzerland (3%). UK exposure is predominantly in Scotland. “We are cautious about investment in the UK and won’t be looking at London or retail in the UK,” says outgoing CEO Morné Wilken**.
Central to its CEE exposure and almost €1bn pipeline is its two-pronged development and co-investment partnership with CEE property specialists Prime Kapital.
“MAS has offshore exposure in markets that are growing at a better rate than in SA. We like everything regarding their expansion but MAS’s residential strategy is unclear,” says Ndlovu.
EPP
JSE- and LuxSE-listed EPP posted distribution growth of 12% for the six months ended June 2018, grew total assets by 19% and NAV by 3.8% and contained vacancies below 1%.
A dominant retail landlord in Poland with assets in Poland’s 20 biggest cities, EPP’s portfolio of 19 retail properties, six office buildings and two development sites is valued over €2bn.
During the half-year, footfall and sales remained flat, primarily impacted by the two Sundays per month trading ban that commenced in March. Yet impact on overall sales and footfall has been limited as consumers shift shopping patterns, with trading increasing on Fridays, Saturdays and Mondays, CEO Hadley Dean says.
EPP has disposed of two office assets for €160m and is in final negotiations for the sale of three assets that will add around €250m to the kitty. Office disposals will also be utilised to reduce loan-to-value (LTV) to the targeted 45%, says Dean. LTV rose 3.5% to 50.9% on the back of the €359m M1 tranche one acquisition of four retail properties. EPP forecasts full-year dividends of 11.8 euro cents.
Hammerson plc
A shifting retail backdrop is the foundation for British retail operator Hammerson plc’s remodelled strategy. The UK-based REIT, which has its primary listing in London and a secondary listing on the JSE, intends accelerating disposals, exiting retail parks and focusing on premium outlets and flagship destinations.
Hammerson is the largest listed property stock on the JSE. At the half-year to 30 June 2018, its £10.626bn retail portfolio comprises 57 assets in 14 European countries, 44% of these non-UK assets.
Given the turbulent UK retail landscape, increased UK retail exposure is not on the cards. This was key to Hammerson ditching its proposed £3.4bn acquisition of British shopping centre rival Intu Properties.
The retail operator is exiting its £1.1bn, 15-strong UK retail park portfolio which contributed a net rental income loss of 3.4% to the overall portfolio. Four have already sold. Retail sales in the remaining 11 are down 2.5% and footfall has declined by 1.6%. Impact from retailers going into administration has adversely impacted short-term income accounting for income reducing by £0.7m in the half year. The expected full-year impact is £2.5m.
In October Hammerson sold a 50% stake in Highcross shopping centre in Leicester for £236m. This represents a 5% discount to December 2017 book value.
While there has been a small uplift in leasing value at UK shopping centres, Rebecca Patton, head of investor relations, says there is a watchlist on certain retailers, like some of the mainstream fashion where lease renewals are becoming harder.
The European markets present a more stable backdrop. Sales and footfall in the 8-strong French shopping centre portfolio are up 2.9% and 2.3% respectively and in Hammerson’s five shopping centres in Ireland, like-for-like net rental income is up 4% and vacancies a mere 1.1%.
Greater geographic diversification intentions mean non-UK retail exposure will increase by around 10%. It will also put more money into premium outlets like its Bicester Village outlet in the UK which has just been extended by 25%.
“Around our city centre locations we are starting to look at other property classes, primarily residential but we may consider hotels and conference,” says Patton.
* Hyprop’s Pieter Prinsloo moves to Europe to head up Redefine Europe. ** Morné Wilken returns to SA as CEO of Hyprop Investments Limited. CFO Malcolm Levy will act as interim CEO of MAS.
This is an edited version of an article that originally appeared in the 25 October edition of finweek. You can buy and download the magazine here, or subscribe to our newsletter here.
