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Property’s time to shine again?

Jan 31 2019 09:48
Maarten Mittner

The two local bellwether property indices have both risen above the benchmark 200-day moving average trading pattern since the start of the year, offering hope to investors in the beleaguered sector that a turnaround is happening.

There has been a number of previous breakouts from the moving average since the highs of January 2018. 

However, they were marginal, and further pullbacks materialised thereafter. 

But this breakout could prove to be more sustainable.The move has been more pronounced in the All Property Index (the ALPI or J803), which provides for a broader global exposure and was introduced in October 2018. 

The traditional SA Property Index (the SAPY or J253) was trimmed down to a more local exposure amid a myriad of challenges, ranging from concerns around expropriation without compensation to higher interest rates in the US, low economic growth prospects in SA, and the negative Viceroy report on Resilient and its linked companies.

Good news for investors is that the bombed-out UK property sector, with the likes of Capital & Counties, Hammerson and Intu, is also seemingly in recovery mode. 

This is based on optimism that the UK could escape a chaotic no-deal Brexit scenario, which has supported the pound lately.

How realistic these views are will only become apparent over the next few months. 

But for now, the market has taken the approach that a 12-month retraction of 21% in the share price of Capital & Counties, 38% at Hammerson and 50% at Intu, adequately prices in the risk of Brexit at these high-quality outfits, even though acknowledging that Brexit remains fraught with danger for the sector.

Locally, the big counters have all recovered from 12-month lows. 

Although the recovery is not yet shooting out the lights, the market appears to have become less risk averse.

That is understandable, given the attractive yield of 9.3% the sector offers at present, the best in a decade and about 50 basis points higher than the present yield on the R186. 

Some property counters are even offering a 38% dividend yield now.

This follows on 2018’s disastrous performance, with the SAPY losing 25% on capital growth and dividends, the worst since 2008. 

The sector was a top performer among the main asset classes over the past few years.But don’t pop the champagne quite yet. 

Although the recovery appears real, there is a long way to go.

Growthpoint has risen 11% from its 12-month low of R22.20 but is still 21.6% off from its comparable high of R31.50. 

Hyprop, with its broad exposure to the high-level retail sector, is trading 10% up from its low of R79.40 but is still down 28% after reaching a high of R123.50 earlier.

Some of the top counters have rebounded markedly above their percentage losses from last year’s carnage. 

EPP has regained 33% from its previous low, and is only 5.7% away from its previous high. Sirius is up 25% after losing 12%. Logistics company Equites’s retraction from its high has narrowed to 5.2%, offering investors 23.9% on the upside from its 2018 low of R16.82.

Even troubled local counter Rebosis, plagued by high debt levels and strategic confusion, gained 3.7% after reaching rock-bottom at R2.43. 

(It’s still down 75% from its previous high of R10.40.) Quality local company Emira has gained 14.4%, but is still down 11.8% from its previous high of R17.19.Accelerate has benefited from the long-awaited opening of the revamped Fourways Mall, now scheduled for April this year. 

The counter has risen 34% from a low of just under R3 a share.

The SAPY index has 21 companies, but is heavily tilted toward Growthpoint and Redefine, comprising about 40% of the index. 

The ALPI earns 50% of earnings from offshore sources. 

Investors in the ALPI can benefit from a more pronounced distribution of risk, having more exposure to foreign markets, and linked to higher economic growth in Europe, compared to SA. 

But SAPY investors are sure to gain from a local recovery, represented by improved GDP growth and steady retail sales.

Compared to global standards, SA’s investable property sector is quite small, with assets under management around R550bn, barely 3% of the JSE’s total market cap. 

The scope for further expansion seems vast, especially on the residential side.

Some analysts have predicted 10% growth for the sector in 2019, capital and income included. This will represent a remarkable recovery from last year, when some companies tumbled 40% to 50% below net asset value in risk-off trade. 

This obviously represented buying opportunities, as the widespread pullback was based on sentiment and emotion and not the real value inherent in the companies.

A few outstanding sectoral issues remain. 

The Financial Sector Conduct Authority has not yet made any finding on the insider trade charges brought against Resilient. 

But brave investors have made the plunge, based on Resilient’s attractive array of assets. 

At present trading levels of around R60, Resilient has returned 51% to investors from its low of R39.75. 

But it is still down 49% from the stratospheric highs of R120 last year, reached before Viceroy struck with its report.

The demand for Nepi Rockcastle has been more subdued. 

At present trading levels it has gained 20% from its low of R96.92, but is down 40% from the 2018-high of R194.78. 

Maarten Mittner is a freelance financial journalist and a markets expert.

This article originally appeared in the 7 February edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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