Downgrade likely but Property Funds taking steps to weather it

Sovereign credit ratings downgrade fears weigh on ‪‎South Africa‬n economy but ‪‎Property‬ groups are getting ready for it, says Ortneil Kutama, SA Commercial Prop News Media Director.

While National Treasury and parts of organized business try to avoid a sovereign credit ratings downgrade, South Africa's listed property sector has very much priced it in.

A downgrade would make it more difficult for the state to borrow money from offshore sources. Property companies however are not always bundled with the country when it comes to risk perceptions and as such ratings downgrades on countries can be overcome by companies.

South African property funds are already struggling in a slow to non growing South African economy, says Ortneil Kutama, SA Commercial Prop News Media Director.

"It is also becoming more expensive to raise capital in SA. Interest rates are on the up. Many property companies are shifting offshore. In fact South African funds are trying to acquire property in the UK, Germany, Poland, Croatia, Slovakia, Slovenia, Serbia, Bulgaria, Greece, The Netherlands, Australia and elsewhere," says Kutama.

Ian Anderson, the chief investment officer of Grindrod Asset Management has assigned a 100% possibility of a ratings downgrade to junk for SA.

But Minister of Finance, Pravin Gordhan said this week that he believed SA could avoid a downgrade and had three months to do so.

The minister met with more than 250 investors with about R600bn in exposure to South African equities and bonds. He went on roadshows in Boston, New York and London.

He said SA needed to prove its resilience. Various ratings agencies are reviewing SA. Fitch and Standard & Poors already rate SA a level above sub-investment grade.

Moody's Investors Service has placed the ratings of 11 South African regional and local governments' (RLGs) and three government-related entities' (GRIs) under review on Sunday for possible downgrade.

In addition, Moody's has changed to negative from stable the outlooks on the ratings of two municipalities.

Moody's said these steps were prompted by the potential deterioration of SA's credit profile as captured by Moody's recent decision to put the country's Baa2 government bond rating on review for downgrade. The ratings agency pointed to the close operational and financial linkages between the national government and municipalities, illustrating the centralised nature of the local public sector.

Gordhan says: “We have got to use the resources we have in order to generate confidence amongst our own investors.”

A downgrade may spur more property groups to move offshore. Growthpoint Properties’ CEO Norbert Sasse says that takeover deals and corporate action are also slowing in SA. This is thanks to the risk of a recession and a downgrade of the country’s credit rating to junk too. Borrowing costs now exceed the rental income that firms receive from shopping malls.

There have been 15 deals worth a combined R10.1bn this year, compared with 20 deals worth R13.83bn in the first three months of last year. There were 90 deals done last year worth R107.3bn, the highest by deal count on record and biggest in terms of value since 2010.

Foreign companies may come and invest in South African property because their currencies are so much stronger than the flailing rand. These may be private companies though.

Maurice Shapiro, head of Ma’alot Investments and fund manager says he thinks that there will be new listings with funds listing on the JSE but having offshore assets or listing to become real estate investment trusts which are popular in SA. Reits have to pay out the majority of their profits as dividends to shareholders.

Ultimately listed funds should manage a credit ratings downgrade in SA but they could definitely do with a better economy and stronger consumer and they can find those offshore.