Property’s run hits obstacles

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Listed property companies have enjoyed a strong few years but the sector is now facing challenges like any investment, reports Ortneil Kutama. Listed property companies have enjoyed a strong few years but the sector is now facing challenges like any investment, reports Ortneil Kutama.

Property stocks continued to perform well over the most recent results season but market conditions and a lack of outlier events suggest this will be the last good set for results for the year.

Listed property companies have enjoyed a strong few years but the sector is now facing challenges like any investment, reports Ortneil Kutama, SA Commercial Property News Media Director.

Various property counters had experienced a strong second half of last year, with their impressive performances continuing into the first quarter of 2015.

The best performer for the reporting period was shopping centre owner Fortress Income Fund. It was also the sector's top property stock in terms of overall returns for last year. In the second half of last year, Fortress achieved a 19.64% distribution growth compared with the six months until December 2013.

The second best performer was Resilient Property Income Fund, which declared distribution growth of 16.3%. This breached the Markey's forecasts of 12%. Resilient was boosted by making accretive acquisitions of lower LSM (living standards measure) regional malls and also from strong returns from its stakes in property funds.

Arrowhead Properties also did well. The group's A and B units both managed 14.9% distribution growth. Shopping mall specialist Hyprop Investments achieved a strong distribution of 13.7% which was also ahead of predictions.

Texton Property Fund also performed well. The fund has made its office properties work within its portfolio. Texton has also benefitted from its deal flow in the UK. The company is starting to buy shopping centres in the country.

CEO Angelique de Rauville says the fund has found opportunities in cities like Nottingham and Reading. "They are cheaper to finance than malls in SA are," she says.

Growthpoint Properties, the largest locally based real estate investment trust managed 7.5% distribution growth. The performance came from many of its assets but especially its stake in the V and A Waterfront where its residential and mixed use aspects are benefiting from professionals looking to live and work in Cape Town.

Growthpoint's rival, Redefine Properties fared similarly well too.

Redefine, which is the second-largest real estate investment trust based in South Africa, grew its distributions by 7.1% to 39c a share during the half year to February, but this was slightly short of what analysts had expected.

Stanlib's head of listed property funds, Keillen Ndlovu said Growthpoint was still a strong company to invest in.

He says the fund which has a market capitalization of about R70bn, delivered decent returns for its size and in a difficult economic environment. Growthpoint's assets are worth nearly R100bn.

He says Growthpoint has a clean and easy to follow company structure.

Growthpoint’s disclosure and corporate governance are among the best in the listed property sector and the company has won awards for them. The company last week won the Investment Analysts Society (IAS) Excellence in Financial Reporting and Communications Awards 2014 for the property sector.

The awards are earned by companies that display excellence in transparency, financial disclosure and communication with members of the IAS and the investment community. The award winners were announced at the JSE last week.

In terms of stocks based abroad, Intu Properties' performance pleased some investors but it has not struck the lights out. It remains very much a rand hedge stock for South Africans.

But there are threats to the future of SA's reits at least for the rest of this year and for next year.

SA’s economic growth is going to be subpar this year and the country will do well to grow at 1.5% this year.

This does not bode well for firms that own office properties which need activity from businesses to decrease their vacancies. Retail landlords who need a healthy spending consumer are also under threat.

Ian Anderson, the chief investment officer at Grindrod Asset Management, says listed property enjoyed a strong bull run over the past few years. In 2014, its returns were slightly abnormal because of some outlying features.

Most of the listed South African funds became Real Estate Investment Trusts (Reits). This involved them taking up a new capital structure, commonly used abroad in larger property markets. SA has become one of the top ten largest Reit markets in the world. By becoming Reits, foreign institutional investors were attracted to the SA funds. Various larger South African Reits joined Reit indices. This prompted foreign index trackers to invest in South African Reits.

This boosted the larger property stocks' share prices.

There was also a fair degree of consolidation last year which boosted capital growth for the listed sector.

This year South African funds are finding it harder to buy out rival funds. Fewer companies are willing to let go of their portfolios than there were in previous years.

Interest rate hikes in South Africa and in America will also put downward pressure on reits' share prices. South African investors will need to choose their reit investments carefully and try to buy into funds with qualities which suggest their returns will grow this year. This could be owning popular malls or having exposure to assets that are performing well in Europe.

Read more on:

SA Property Market  |  Listed Property / REITs  |  Growthpoint Properties  |  Redefine Properties  |  Arrowhead Properties  |  Fortress REIT Limited  |  Resilient REIT  |  Keillen Ndlovu  |  Real Estate Investment Trusts (REITs)  |  Ian Anderson  |  Intu Properties  |  Texton Property Fund  |  Ortneil Kutama