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As an affordable, alternative means of property ownership, listed property is an attractive investment proposition.
And the sector, in particular South Africa’s real estate investment trusts (REITs), has also proven to be a defensive one.
SA REITs have an important role to play in property ownership in the country, says SA REIT Association chairman Izak Petersen, also CEO of Dipula Income Fund.
“Owning Sandton City or the V&A Waterfront may be out of reach, but you can own a piece of the pie by investing in REITs. It is a very accessible investment underpinned by physical property assets.”
The listed property sector, specifically South African REITs, is quite adept at posting good returns and mitigating against risk.
REITs are also uniquely positioned to weather periods of volatility and uncertainty.
Over the past few years, REITs have upped their offshore expansion. They have become more specialised, locked in good funding rates and managed interest rates conservatively.
In addition, REITs have developed their own products and introduced new asset classes like residential, storage and student housing.
SA REITs typically have 80% of interest exposure hedged and they maintain low gearing levels that afford these entities even more resilience to currency fluctuations.
“With low loan-to-value (LTV) ratios and strong balance sheets, REITs are able to wait out market ebbs and flows, and perform well over the longer term,” says Petersen.
Strength in diversity
SA REITs have broad local and offshore commercial property exposures across the office, industrial/logistics and retail sectors.
These diverse portfolios help cushion the impact of weakening local fundamentals such as increasing office vacancies and declining retail trading densities.
Locally, demand for office space has stalled. “We expect offices to come under significant pressure and see this as a medium- to long-term issue.
There are pockets that are still seeing strong demand and growth in rentals (e.g. Claremont CBD in Cape Town), but generally the supply of new space and the pipeline are outstripping the demands of local tenants and we see few international new entrants to the market,” says Kelly Hook, analyst at Metope Investment Managers.
Historically, retail-focused REITs have posted higher returns than those specialising in the office or industrial space. And while retail locally is now pretty much saturated, good quality and dominant retail assets in prime locations continue to prosper, with larger regional and super regional shopping centres exhibiting the lowest vacancies.
“Prime retail assets continue to be defensive, and as we have seen in the wake of store closures from Stuttafords and Edcon, a shopping centre in a good location with high footfall has the ability to replace the tenant without significant impact to the centre,” says Hook.
Estienne de Klerk, managing director of Growthpoint Properties, SA’s largest REIT with assets of R120.4bn, says that SA is essentially fully developed for shopping centres.
Overdevelopment comes at a price, Growthpoint says, citing information out of the US that points to an estimated 30% of shopping centres there closing in the next five years.
Much of that has to do with advanced online shopping and an efficient logistics and delivery system in the country.
SA's bricks-and-mortar retail asset owners are perhaps fortunate that we are somewhat behind in both, but it does point to listed property gearing up for this inevitable e-commerce movement, with the focus perhaps shifting to industrial assets.
“The industrial sector relies heavily on GDP growth and increasing private consumption in order to stimulate demand.
”While we expect this to remain under pressure during 2017 and beyond, historic undersupply of modern high-quality logistics warehouses and distribution centres will result in high occupancies and strong demand for those assets.
”Landlords are looking to secure high-quality income streams in order to de-risk their portfolios, and quality industrial tenants with long leases fit this profile,” Hook tells finweek.
Adding to the appeal of the sector, industrial was the best-performing sector in 2016, returning 13.6% over retail’s 12.6% and office (7.6%), according to MSCI/IPD.
Offshore focus
In light of local risk, offshore expansion focus has heightened and most SA REITs now have international exposure. On average, SA REITs have around 30% of their investments offshore and approximately 30% to 40% of their earnings come from outside SA.
While some REITs continue to focus on developed regions, Central and Eastern Europe’s (CEE’s) positive spread between yield and cost of capital is proving an enticing drawcard for many.
Among those venturing into the region is retail-focused Hyprop Investments, which now has offshore exposure via a 60% interest in four shopping centres in southeastern Europe.
Growthpoint meanwhile recently acquired a 26.9% stake in Global Worth Real Estate Investments Limited, the largest owner of office space in Romania.
On the road to achieving REIT status, JSE-listed capital growth fund and developer Attacq holds 30.8% in MAS Real Estate, which invests in Western Europe and CEE. Attacq’s assets are valued at over R27bn and it is targeting 20% annual growth in distribution.
Over the past 20 years, listed property has yielded an average return of 19% annually. The South African Listed Property Index (SAPY) is expected to post returns of 8% to 10% for 2017, returning about 6.1% year-to-date.
REITs meanwhile are reporting income growth numbers that can reach high double digits.
“As a sector, growth in income distributions has been inflation-beating. Although not at the same historical levels, I believe REITs will still deliver superior relative performances due to the depth of their portfolios and good management teams,” Petersen tells finweek.
“Our SA REITs hold well-diversified portfolios which should shield investors from short-term volatility in sector and property-specific risks. The income base is also protected by the high level of hedging that REITs have overlaid on interest rate exposure.”
As with most markets, the current economic situation in SA and rand volatility will undoubtedly affect REIT performance.
“Investors should construct their REIT portfolios in a manner that gives them exposure to REITs on a balanced basis taking into account the specific assets of each REIT,” advises Petersen.
This is a shortened version of the cover story that originally appeared in the 24 August edition of finweek. Buy and download the magazine here.
