Looking at the stellar results from the SA property sector, it’s easy to forget that the strong expansion has come from relatively young companies – most only listed on the JSE in the last 10 to 15 years.

For example, under the leadership of CEO Norbert Sasse, the biggest SA-based listed property fund Growthpoint Properties grew from a market cap of about R30 million in 2001 to close to R75 billion by mid-2015.

Last year, listed property outperformed equities, bonds and cash for the sixth time in 10 years. The FTSE/JSE South African Listed Property Index (Sapy) achieved a 26.6% return, including dividends, outpacing the JSE All Share Index, which mustered 10.9% in 2014.

In rand terms, Sapy delivered a total return of 8.68% in the first four months of this year while the S&P Global Real Estate Investment Trust Index only achieved a return of 3.47%, says Stanlib’s head of listed property funds, Keillen Ndlovu.

Much of the performance has come from the fact that not a lot of commercial property was listed in SA in the 1990s. Funds have also benefited from adding shopping centres to their portfolios. Retail property has been a must-have because South Africans are great fans of malls. Families shop much like their US counterparts.

Meanwhile, office properties have also performed well post-1994. Sandton City, for example, was quickly developed after the first democratic elections to include offices of many blue-chip firms from SA and abroad. This mainly took place after Johannesburg’s inner city fell into mismanagement in the last two decades.

Over the past two years, listed property has received a boost as a result of consolidating funds and moving in line with global best practice, in terms of capital structure and tax rules.

Many listed property companies have been quick to build shopping centres because of their popularity among South Africans

Chief among structural developments has been the real estate investment trust (REIT) dispensation. It was adopted in SA towards the end of 2013, and is used globally. Reits use an ordinary share structure rather than a complex, linked-unit one. They have revolutionised the sector as they ensure that property funds always pay regular income returns.

Each REIT must pay at least 75% of its taxable earnings available for distribution to its investors annually. This makes listed-property funds reliable dividend payers, which suits risk-adverse investors. REIT status has – importantly – attracted offshore investors, particularly index trackers.

These entities stand out as investments in trying economic times because of their ‘assured’ income. Even though the capital return can struggle when economic activity is poor, the income return could still be consistent, says chief investment officer of Grindrod Asset Management, Ian Anderson.

Most experts say that economic growth projections for SA in 2015 are quite negative. In May, Statistics South Africa released data showing that the country’s GDP expanded by a seasonally adjusted and annualised 1.3% in the first quarter of 2015, compared to 4.1% in the fourth quarter of 2014.

Anderson says soft economic conditions, including a weak consumer, do not bode well for retail-property owners. Retail property has a history of outdoing other property subsectors such as offices, industrial and residential. It seems, then, that South Africans love to shop – even in tough times.

Many listed property companies have been quick to build shopping centres because of their popularity among South Africans. Financial consultancy Macquarie, in its research earlier this year, says that the listed property companies’ exposure to regional malls larger than 30 000 m² had actually doubled between 2010 and 2014. But analysts have warned that SA is – or soon will be – ‘over shopped’. Historically, however, retail property assets have outgunned other property types.

Ndlovu says that retail is a strong defensive asset. ‘The dominant retail sector, which includes regional and super regional malls, continues to do well relative to the office and industrial sectors. In fact, smaller retail in the form of some neighbourhood shopping centres continues to do well in some strong nodes too. The demand from local and offshore retailers for shopping space at malls still provides an underpin for bigger shopping centres despite a weaker macroeconomic environment.’

Anderson believes distribution growth will still outrun inflation this year, while capital price growth won’t be as great as it has been in past years. Consumer price inflation was measured at 4.5% year-on-year in April. He says there are still various compelling investment opportunities in the listed-property sector, especially in those companies that did not benefit from index inclusion and that are trading on forward yields of between 9% and 11%.

‘The dominant retail sector continues to do well relative to the office and industrial sectors’

KEILLEN NDLOVU, HEAD OF LISTED PROPERTY FUNDS, STANLIB

The sector has also caught the interest of more institutional investors in the country as merger and acquisition activity over the past two years in particular has created larger and more liquid stocks.

Growthpoint Properties and Redefine Properties are the two largest local REITs, and both have most of their assets in SA. Once the latter completes its likely takeover of Fountainhead Property Trust, it will account for more than half of the Sapy (along with Growthpoint Properties).

Albeit the largest REIT by market cap, Intu Properties’ assets are offshore.

Chances are that larger property funds will buy small, specialised stocks. Residential, specialised funds are the most likely to list and these could entice large funds seeking acquisitions.

Investors have so far been spoilt in terms of the types of property funds available. Companies have not only achieved strong returns from regional and super-regional malls and office developments in Sandton and Bryanston in Gauteng, but also from government-tenanted buildings.

Other property funds have generated returns from township multi-use properties and by owning assets overseas. In fact, many funds are buying assets abroad because they are often cheaper to finance. Being exposed to offshore assets shields investors from the currency effects of a weak rand when compared to the euro, for example. Others are targeting local inner-city centres.

Jeffrey Wapnick, MD of Octodec Investments, says the loss of a business presence in Johannesburg’s CBD creates an opportunity. ‘Many big companies left, but we need to reclaim the city,’ he says. ‘We want it to thrive again.’

Wapnick is investing in both Johannesburg and Pretoria’s CBDs, with a current focus on residential and mixed-use developments.

While analysts have an eye on any possible changes in the repo rate, which could spell headwinds in the sector, most are bullish of the long-term possibilities.

Citadel investment analyst Mike van der Westhuizen says property is facing some pressure in the short term but it should maintain its strong returns over time.

‘Given the prevailing market sentiment, it certainly won’t be smooth sailing as we move closer to the point of interest-rate normalisation.

‘Nevertheless – and regardless of short-term volatility – listed property remains an integral part of a multi-asset portfolio, and its defensive income-generating nature can produce attractive total returns, income and capital growth over time across a variety of economic scenarios,’ he says.

By Alistair Anderson
Image: Andreas Eiselen/HSMimages