Strong corporate governance key to SA REITs success in 2019

Our members want investors and stakeholders to be confident in the consistency of reporting from the sector, says Andrea Taverna-Turisan

Having been battered with a few allegations of financial manipulation and delays in reporting results, South African Real Estate Investment Trusts (REITs) can enhance investor confidence with robust corporate governance system.

A business is only as good as its reputation. And now, more than ever, we are living in a world where reputations can be made, and destroyed, overnight.

Last year, the listed property sector suffered damning reports from entities such as NEPI Rockcastle (JSE: NRP) and Orion Real Estate (JSE: ORE). 

Nepi Rockcastle saw its share price dive-bomb following a report by Viceroy Research which alleged the company manipulating or inflating its net profit after tax numbers. Shares in Nepi fell 14% to close at R99, pushing its decline in 2018 to more than 50%.

Resilient REIT, the founding member of Nepi Rockcastle, Fortress and Lighthouse Capital, has challenged regulators to speed up their investigations and bring the matter to rest.

Last month, the company said it had done all it could to assure shareholders that its management was not guilty of wrongdoing and that only the Financial Sector Conduct Authority (FSCA) could bring an end to the ongoing uncertainty.

ALSO READ: Nepi Rockcastle sees R9bn wiped off its value after Viceroy report

Meanwhile, Orion Real Estate failed to meet the JSE’s deadline for publishing financial statements and had their shares suspended on the first trading day of November 2018. 

Orion was suspended because of the listed property company’s failure to submit its provisional financial results report within the three-month period after the end of its financial year as stipulated in the listing requirements.

The SA REIT sector’s focus on improved corporate governance is expected to support positive sentiment for investment in listed property this year.

“The performance of SA REITs in the coming year will be influenced by improving levels of confidence in the listed property sector,” says Wynand Smit, real estate analyst at Anchor Stockbrokers.

The sector’s positive performance prospects signal double-digit growth in returns to investors, which should be around the sector’s historical annualised 10-year total return of 14%.

Smit notes that improved confidence levels “will depend on the steps taken by individual companies but, more importantly, steps taken by all stakeholders and relevant industry bodies such as the SA REIT Association.”

ALSO READ: Resilient wants regulators to speed up investigations

Since its inception in 2013, when REIT legislation was introduced in South Africa, the SA REIT Association (SA REIT) has prioritised driving transparent, clear and comparable financial reporting for the sector. 

SA REIT is currently updating its Best Practice Recommendations (BPR), which it first published in 2016. The SA REIT BPR was driven by the sector as most of the metrics that REITs are measured by aren’t strictly governed by IFRS. So, the BPR is intended to reduce divergence in reporting implementation among sector counters. 

The association has resolved to revise its BPR with an even more vigorous focus on consistency and transparency in the financial reporting of REITs. The updated BPR will reflect new accounting and regulatory issues, address issues raised by asset managers and integrate changes proposed by key industry stakeholders. 

Smit points out that there is a big focus on sustainable earnings in the sector, saying, “Investors have voiced their preference for clean, sustainable earnings.” Naturally, transparent reporting ensures that a REIT’s sources of income are clearly stated. SA REIT expects to share its progress with the market in this regard early in 2019.  

Andrea Taverna-Turisan, SA REIT Marketing Committee Chairman, says, “The time is right to take the next step and issue more robust guidance for REITs. Our members want investors and stakeholders to be confident in the consistency of reporting from the sector. Overall, the REIT sector has established a track record of transparency and trust, and we want to reinforce this in the market. We are putting the sector on the best footing for best practice as it enters 2019.”

Catalyst Fund Managers expects 2019 to stand out from the past year because of the big focus on improving governance in the sector. 

Mvula Seroto of Catalyst goes as far as saying improved corporate governance will make REITs a good investment in 2019. He adds, “The sector is still impacted by the allegations against Resilient and affiliated companies. They currently make up roughly 27% of the SA Listed Property Index. A positive outcome from the pending Financial Sector Conduct Authority (FSCA) investigation into the Resilient group of companies would be welcomed.”

Besides an improved focus on governance in the sector and its positive performance outlook in 2019, factors that market commentators believe will make SA REITs appealing investments in the year ahead include the sector’s historically high yields and the good value to be found in the share prices of many REITs.

The SA REIT Association represents South Africa’s R330 billion listed REIT sector. Its members comprise all the country’s listed REITs, which play an essential role in the economy and the lives of South Africans.