SA listed property — Is the Party Over?

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South Africa's Listed Property achieved total returns of 1.92% while the All Property Index showed negative at -0.4%. South Africa's Listed Property achieved total returns of 1.92% while the All Property Index showed negative at -0.4%.

The listed property's party is over and investors who’ve invested because of the sector’s historic ability to deliver inflation-beating dividends are no doubt wondering if it’s still the best place to stash their cash.

But Property, however, has proven to be resilient as there will always be a need in one form or another.

In the meantime, the South African listed property sector has started to experience tougher conditions especially weaker economic growth.

Investors in the sector, which barely eked out a return in 2019, are set for more pain in 2020 as it is expected to show no dividend growth for the first time in 17 years.

The sector was the worst performing asset class for the second straight year in 2019, despite recovering to modest growth after its 25% plunge in 2018. SA Listed Property Index (Sapy) achieved total returns of 1.92% while the All Property Index showed negative at -0.4%.

Dividend payouts have come under mounting pressure over the past past months as SA-focused real estate investment trusts (Reits) increasingly battle to fill the empty spaces in their buildings and convince cash-strapped tenants to renew leases at higher rentals.

The average dividend growth achieved by the property sector as a whole has already decelerated from 8%-12% a year between 2013 and 2017 to just 3.5% last year. In fact, a number of SA-focused property counters have in recent months declared a drop in income payouts for the first time in their JSE-listed history.

Fund managers have forecast that while the income of offshore-invested property groups will rise about 5%, those with an SA focus are expected to fall by a similar amount. Overall, analysts expect the FTSE/JSE SA listed property index (Sapy), which consists of offshore and local investments, to deliver no dividend growth.

What’s worse, listed property investors are not only losing out on the income growth front. The sector has also been exposed to hefty capital losses over the past 18 months, and the SA listed property index is now trading at seven-year lows and at about 34% below the record peak reached in December 2017.

More bad news for income-dependent investors is that companies are now starting to introduce lower dividend payout ratios. That will place further pressure on the sector’s already anaemic dividend growth prospects.

Legislation adopted by the JSE in 2013 compels Reits to pay out at least 75% of their distributable earnings to shareholders in the form of a distribution or dividend, but SA Reits have until now typically paid out 100% of their income.

Last year, sector heavyweight Redefine Properties announced it was reducing its payout ratio from the usual 100% of distributable earnings to 93%.

Delta Property Fund, which has a large government-tenanted office portfolio, has also cut its payout ratio, so that its interim dividend for the six months to August 31 tumbled by a hefty 69% year on year: from 39.40c to 12.19c a share. Rebosis Property Fund, which last year declared a 30% drop in distributable earnings for the year to August 31, skipped its dividend altogether.

As a result, Keillen Ndlovu, head of listed property funds at Stanlib, has adjusted his dividend growth forecast for the next 12 months down to 0%, from 2%-3% five months ago.


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