An ongoing search for yield continues to support demand for property scrip

SA-focused property stocks are likely to again outperform their JSE-listed offshore counterparts this year.

Last year’s divergence in the share-price performance between the JSE’s SA and offshore property stocks seems set to continue into 2017, with former rand-hedge market darlings such as Capital & Counties Properties (Capco), New Europe Property Investments, Intu Properties and Tradehold extending their losses in recent weeks.

Year-to-date (to February 6) declines have been led by offshore counters exposed to the UK, no doubt fuelled by the ongoing uncertainty around the timing of Britain’s exit from the EU and a still-strong rand.

London-focused Capco has shed 7% since the beginning of the year, which means the owner of trendy mixed-use precinct Covent Garden has now lost more than 55% of its value since early 2015.

Other UK-focused stocks such as Capital & Regional, Intu Properties, Redefine International, Stenprop and Tradehold — retail tycoon Christo Wiese’s UK and African property play — are down more than 30% over the past 12 months.

The new kids on the JSE’s foreign real estate block, Hammerson, one of Europe’s largest mall owners, and Poland-based Echo Polska Properties have both also experienced substantial declines on last year’s listing prices.

That is in stark contrast to the 30%-plus returns notched up by a number of local property stocks over the past 12 months, including Dipula Income Fund (B units), Equites Property Fund, SA Corporate Real Estate Fund and Rebosis Property Fund.

Even large-cap counters such as Growthpoint Properties and Redefine Properties have delivered a 20%-plus return over the past year.

Despite offshore counters weighing on the performance of the sector as a whole, the SA listed property index recorded an impressive 15.4% total return for the 12 months to the end of January, according to latest figures from Cape-based Catalyst Fund Managers.

That is comfortably ahead of the all-share index’s 10.3% over the same time.

“We [Sesfikile Capital] don’t see the fundamental outlook improving in 2017. The funding environment will get increasingly more challenging and we will likely see more political jostling as we move towards the ANC elective conference”
Evan Jankelowitz

The positive performance by local property counters has been driven by better-than-expected dividend growth of an average 10.5% in 2016 and a stronger bond market.

An ongoing search for yield continues to support demand for property scrip. The sector now trades at a forward dividend yield of a respectable 7.5%, with some local stocks
offering income-chasers initial yields as high
as 9%-11%.

Most analysts expect local property stocks to again outperform their JSE-listed offshore counterparts over the next 12-18 months, given ongoing uncertainty around Brexit and growing political tension in Europe.

While currency movements are more difficult to predict, most expect the rand to hold up relatively well this year — bar any unexpected events.

“Domestic property stocks currently offer better value than their offshore counterparts, with a number of small and mid-cap local counters trading at attractive discounts to net asset value,” says Ian Anderson, chief investment officer of Bridge Fund Managers. He refers to, among others, Rebosis, Indluplace, Tower Property Fund, Accelerate Property Fund and Equites.

However, analysts expect returns for the sector as a whole to slow somewhat in 2017. Keillen Ndlovu, head of listed property funds at Stanlib, is forecasting a total return of between 8% and 10.5% for the year, with dividend growth slowing, coming in at
an average of 7.5%.

Sesfikile Capital is expecting a similar total return of 8.9%, but believes dividend growth will settle at about 9%, with perennial outperformers such as Resilient Reit and Fortress Income Fund pushing up the average. Last week, both these counters reported
double-digit growth in dividend payouts for
the six months to the end of December — at 16.2% and 15%.

Sesfikile Capital director Evan Jankelowitz says the company is cautious about the outlook for the SA property market, given how little new demand there is for space across the
retail, office and industrial sectors on the back of a weak economy and an overall lack of confidence.

“We don’t see the fundamental outlook improving in 2017. The funding environment will get increasingly more challenging and
we will likely see more political jostling as we move towards the ANC elective conference at the end of the year. So the path towards the expected 8.9% total return will be volatile,” he says.

However, Jankelowitz believes there is still selective value to be had. “We like companies that are focused on a particular sector, with in-depth knowledge of their markets and a hands-on, active management approach.”

He expects rural shopping centre owner Fairvest and industrial-focused Equites to deliver above-market returns over the next 12 months. “These two stocks are trading at yields of around 11% and 8% respectively and are still expected to deliver double-digit dividend growth.”

Vukile Property Fund is also one to watch.

“Management has gone a long way to improve the quality of the portfolio and increase exposure to the retail sector. We believe the stock deserves a better rating,” says Jankelowitz.

Though Resilient may appear expensive on a 4.7% initial yield, Jankelowitz says the company remains a good buy given the “exceptional income growth numbers still being achieved by a highly experienced management team”.