By Suren Naidoo
While the FTSE/JSE South African Listed Property Index (SAPY) achieved total returns of 17.2% in 2017, SA REITs (real estate investment trusts) specifically returned 13.5%. Research from Bridge Fund Managers showed that SA REITs returned 14.7% in 2016, which highlights a slowing growth trend in the local REIT space in 2017.
It’s a clear indication of the tougher year experienced by SA REITs last year, largely due to SA’s poor economic growth and business confidence. SA REITs still achieving double-digit growth is noteworthy considering overall business and political conditions in 2017. It highlights the professionalism, competitiveness and increasing sophistication of the SA REIT sector.
The overall listed property sector still outshone cash and SA Bonds in terms of returns last year, and came just behind SA equities. Cash delivered returns of 7.52%, while SA bonds came in at 10.19% and SA equities delivered a 20.9% returns performance.
Izak Petersen, SA REIT Association Chairman, said last week in a statement: “Despite a very tough operating environment locally throughout 2017, the SA REIT sector continued its solid track record of a strong positive performance for investors.”
Questioned by SA Property Insider about the tapering trend, he reiterated that it was “an outstanding performance”, under very difficult conditions. “We saw most REITs and the sector on average reporting positive growth in income. REITs are a compelling investment proposition for all investors seeking to realise inflation-beating returns. The ability of REITs to lock-in inflation shielding escalations come in handy even during times of short term volatility, as has been experienced in SA and globally,” said Petersen.
In terms of his expectation for 2018, he comments: “We are currently experiencing heightened levels of volatility, which makes predictions difficult. However, I am still positive that the sector will return income growth of 7% or more, whilst share prices will be relatively stable as things return to normality on the back of political stability.”
Petersen adds: “I expect more confidence to return to stock markets during the course of the year. We may therefore see total returns in excess of 14% for the sector.”
On the new listings front, he believes there won’t be many REITs coming on to the JSE in the year ahead. “I am not aware of large scale listings coming to market. However, consolidation is always a possibility for especially mid-sized to smaller funds. I expect that there will be attempts in this respect, but that this will be cautiously approached and only implemented if there are synergies between parties,” he said.
According to the SA REIT Association, the internationalisation of South Africa’s listed REITs and significant increase in its international exposure, emerged as dominant trends in the sector in 2017. The trend of increasing global exposure, to pursue growth in other investment markets around the world, seems set to continue in 2018 as long as local market conditions remain difficult.
“The SA REIT sector’s offshore expansion began over a decade ago with early investments in the UK, Western Europe and Australia. It has gained increasing momentum over the past two years and now the sector has exposure in over 25 countries, mostly in Eastern and Western Europe. In fact, some 40% of the listed property sector’s assets are now offshore,” the association said.
Asked where the new growth for the sector is anticipated to come from, besides internationalisation, Petersen remarks that vacancies have been creeping up in the sector and this was “low hanging fruit for funds” to capitalise on.
“In addition to this, funds will become more efficient and look at ways of cutting costs and generating non-GLA income from things such as solar and water harvesting… Of course the sector will continue to look at residential rental stock and may even invest in previously unexplored or under explored specialist sectors, such as medical and others,” he adds.
From an environmental and resource sustainability perspective, Petersen concedes the Cape Town water crisis has put the issue of sustainable development more in the spotlight.
“The sector started a while back already with sustainable building and retro-fitting buildings for better efficiency, this will in all probability gain more momentum. I believe that alternative energy will continue to be explored, subject to risk return considerations, and that more effort will be made to save, recycle and harvest water. Consideration will go into more sustainable and efficient landscaping and planting utilising more indigenous plants, etcetera,” he explains.
Petersen is CEO of JSE-listed Dipula Income Fund and was elected Chairman of the SA REIT Association last year. He is looking forward to the upcoming SA REIT Conference next month.
The association is hosting its biennial SA REIT Conference at the Sandton Convention Centre, on Thursday, 15 March 2018. Sponsored by Nedbank CIB, the conference has proven to be an event of powerful significance to this sector.
* For more information or to register as a delegate for the SA REIT Conference 2018, visit https://www.sareit.com