SA Reits beat other investments in 2015 but face challenges in 2016

While being the best performing asset class of 2015, South African Real Estate Investment Trusts (REITs) are having to weather many challenges which have prevailed for the past four to five months.

South African listed property once again outclassed bonds, cash and equities in 2015. Listed property returned 7.99% to its investors, outstripping cash’s 6.46%, equities 5.13% and bonds’ -3.93%, according to figures from Catalyst Fund Managers.

Speaking on the sector’s top performance, SA REIT Association Chairman, Laurence Rapp said: “Despite a tough operating environment and the brutal turmoil that hit local markets in December, the SA REIT sector continued its excellent track record of outperformance for investors in 2015.”

Listed property’s returns were somewhat lower than in recent years after it took a nasty knock in December, with other sectors, as capital markets responded to what has been coined Nenegate. As the market was rocked by the news, listed property dropped around 10% in two days. It later recovered to some extent. Despite these gains, in December listed property still lost 6.12%. Before then, listed property wasn’t only leading other asset classes but outperforming market expectations.

Developing markets including SA are experiencing capital flight. This is placing companies’ growth in these countries, including South Africa, under pressure.

Mostly offshore listed funds have performed well. They were the top performers in 2015 and South African investors have enjoyed dollar based income pay-outs which are then converted into rands. The Rand has been poor performing currency for months.

At least 6 of the top 10 performing property funds on the JSE last year, had exposure to offshore assets or were totally offshore. This is likely to persist in 2016 as the South African market looks competitive and the economy struggles to grow. The International Monetary Fund (IMF) earlier this month cut its economic growth forecast for South Africa by almost half to 0.7% because of weak commodity prices and high borrowing costs.

Intu Properties which is listed on the JSE and owns major malls in the UK, achieved a return of 24.86% last year. Capital and Counties, also a property owner in the UK, achieved an overall return of 56%. SA’s largest South African based fund, Growthpoint Properties’ total return fell nearly 10%.

The IMF's forecast is a full percentage point lower than the economic growth rate forecast which was made by the National Treasury for 2016.

Nevertheless, investors should not only invest in offshore based or exposed companies. Some smaller and not necessarily high quality companies are listing on the JSE from abroad largely because they are so hyped.

A number of analysts believe that Schroder European Real Estate will be a top performer this year. Schroder offers local investors exposure to European markets which are expected to gain pace in 2016.

Some South African funds will look to invest abroad this year too. Tower Property Fund, for example is expanding its operations in East Europe’s Croatia.

Evan Robins, the head of Old Mutual Investment Group’s Macrosolutions Boutique says investors must be wary of the companies that do operate abroad and see the JSE as a good place to list.

“Investors who are keen to buy offshore shares on the JSE should know exactly what they are buying. There has been a plethora of inward listed property companies on the JSE catering for this demand pf different quality. You must ask questions about seemingly opportunistic companies raising money in SA because they can’t raise it in their home market or are trying to access much cheaper capital in SA which then implies that South African investors would be paying too much,” he said.

Investors must also be aware that while by investing in offshore or exposed companies, they protect themselves against rand weakness, the rand could recover and then they will be hurt so they must think longer term and diversify. This means they should invest locally and offshore.

Grindrod Asset Management’s Ian Anderson said people should buy into locally based property funds now while their share prices are depressed and even if they find 2016 difficult amid weak economic growth and few acquisition opportunities.

The long term should see listed property recover in SA. Listed property remains a sector with much growth potential and there will be a period of consolidation again. Listed property was the most active of any sector on the JSE last year in terms of capital raises and new listings.