South African listed property sector uncertain about the current valuations as well as future income

By Thabang Mokopanele

Editor-In-Chief

South African listed property market is facing one the toughest trading conditions ever since the dawn of democracy with the sector uncertain about current valuations and even future income with COVID-19, recent downgrade to junk status and economic recession all taking their toll.

The biggest challenge facing the South African listed property market is how long the lockdown will last for and what are the economic implications over and above the recent downgrade to junk status.

Stanlib Head of Listed Property Funds Keillen Ndlovu says the listed property sector has lost just over 48% year to date for the first quarter of 2020 making it the worst period ever for the sector.

“Discounts to Net Asset Value (NAV) now exceed 55% and historic yields are in excess of 17%. These numbers are so weak or cheap.  NAV and yield that they reflect that the market is very uncertain about the current valuations as well as future income (forward yields),” Ndlovu says.

“We have seen a number of REITs withdraw their distribution growth guidance last week, over and above some postponing their distribution payments, exposure is in Central and Eastern Europe in Poland and Romania and is mainly in the retail space with some offices and an emerging residential sector still minor.”

For South African listed property funds the exposure in the UK and Australia is a combination of industrial, offices and retail.

USA or USD is  basically all retail in the US as well as rest of Africa. “Looking back 10 to 12 years ago, SA REITs had barely any offshore exposure. Now this has growth over time to 48% of assets,” Ndlovu says.

“It’s probably important to highlight that the property sector has basically not received any benefit (for its offshore exposure) from the market from the rand weakening by about 28% in the first quarter.

“The hybrid with local and offshore and inwards listed property stocks also took similar pain (and totally ignored currency movements) as the local focussed stocks or the one with more local focus.”

Impact by sector

Retail – “Facing tough times due to stores not trading apart from pharmacies and supermarkets. We are likely to see rent reductions, concessions or payment holidays. Arrears and bad debt will increase.”

Offices – facing challenges of oversupply as well as a weak economy. Ability and success of people working from home could be a game changer and further weaken demand.

Industrial – largely dependent on the success of the retail sector and mainly logistics and warehouse driven. “Online players, though still small, will benefit from increased online shopping,” Ndlovu says.

Offshore – benefitting from currency weakness (though not fully reflecting in local share prices of most of the offshore players or hybrid  REITs ) but everyone is facing the same situation due to lockdowns. “However, governments in the UK, Australia and Europe have much deeper pockets (than SA) to support their citizens and businesses. Watching out for REITs who have taken more risk on Cross Currency Swaps,” he says.