“Double, double, toil and trouble” … Or, at least, so it seems. Listed property has been cast the villain of the South African asset classes for some time now, and maybe for good reason. Since the news broke of the alleged resilient misdealings late in 2017, it has been a troublesome time for the once loved and celebrated asset class. But has the villainous tag caused the sector to be greatly undervalued, signaling massive upside potential? Or will the future hold more “toil and trouble” as the aftereffects of Covid-19 and a global movement to online shopping and “work-from-home” take their toll?
Coming off more than a decade of double-digit annual returns, some might even have said that the fall was inevitable. The graphs below illustrate the meteoric rise in capital prices of the SA listed Property sector, from January 2006 to December 2017, and then the plummet to where we find it today. At the lows, taking investors back to levels last experienced in 2011.
SA Listed Property Sector: 2006 – 2021
SA Listed Property Sector: 2006 – 2017
SA Listed Property Sector: 2018 – 2021
Source: FE Analytics
With that being said however, there has been a very welcome reprieve from April 2020 to now (about 36%).
Covid-19, online shopping and “work-from-home”
The global trend to move away from “old” or conventional methods of interaction has taken a big toll on certain property sectors. The conversations around watercoolers and “braaivleis” fires about the imminent doom of big malls and the surge of the “Takealot” or “Amazon” era are not unwarranted. Many retailers have had to adapt to the online market and those that did not have either fallen by the wayside or are frantically trying to catch up. This has made life difficult for owners of super regional malls that had tenants struggling to stay in business, of which Edgars is only one example.
Then came Covid and the whole situation went from bad to worse. Fortunately, it seems like South Africans are more likely to stick to their traditional shopping habits than our developed market counterparts. The sales figures for many of the bigger regional malls are picking up again, but it is not quite back to the pre-Covid levels just yet. Interestingly, it’s been an entirely different experience for the smaller “convenience malls” that are scattered around suburbs and rural towns. These have seen sales figures actually increase through the lockdown period – a trend which has remained through the easing of lockdown restrictions. Checkers and other anchor retailers in these malls have successfully embraced the “online retail” world with their various online offerings – a sensible explanation for their sales figures.
The other sector of the property market that is still struggling to cope, is office space. The extended lockdown period has (in most instances) opened the eyes of many business to the benefits of a “work-from-home” structure. With most companies reporting an increase in productivity in those employees that had a role that could function outside of an office. And, although we look forward to the day that we can return to some level of “normalcy”, many companies have decided to keep a certain part of their business in a permanent work-from-home structure. This is great for employee moral and, in most cases, company expenses and bottom-line profit, but not so great for the landlords of those office spaces. Although it is unlikely that big office blocks will be demolished anytime soon, there is going to be long term pressure on the market with more negotiation power sitting in the hands of the tenant going forward.
The case for storage and warehousing
Although many companies have seen massive reductions in sales, some have benefitted from the “new way of working and living” brought on by an extended lockdown period. Within the property sector these would include storage and warehousing. Amazon has been one of the biggest investors into South Africa (and specifically Cape Town) within this sector. They rolled out a big data center and call center development with plans on more big investments to come: Amazon to set up African headquarters in R4 billion Cape Town development
Other big winners in this category include Store-age and Equites. It’s clear that South African (and global) lifestyles have changed considerably and that these businesses are in the right space to benefit from this. Although our high-speed internet coverage is not yet “world class” (this includes fibre and 5G networks), we are not far behind. This, together with relatively cheap property prices and a central global positioning (GMT+2), were the major drivers behind Amazon’s decision to invest in Cape Town some years ago. This puts South African entrepreneurs in a very interesting situation.
The following factors; stable internet (for the most part), US quality data storage, many skilled employees being retrenched because of the lockdown and willing to work for less than their worth have lead to more and more South Africans working at home for global companies, either permanently or on a freelance basis. This is increasing the demand for better quality internet and data-storage, increasing the need for more space (to set up an office, etc.) and the demand for self-storage and warehousing. Although this is still a very small portion of the population, we should see considerable growth within this space in the short to medium term.
When looking at the fundamentals of the property sector on a case-by-case basis, it is also looking rather cheap. Although LTV (loan-to-value) ratios have taken a knock during the last year, many REITs have made a big effort to bring their LTVs back within normal range. Many decided to reduce or even withhold dividends and some liquidated non-core assets and reinvested the proceeds to prop up their balance sheet.
When looking at dividend yields, most REITs are at all-time highs. Although this is monthly because of a much lower share price, it still makes for an attractive investment opportunity. The problem is that forward yields and forward earnings are difficult to predict, and management estimates are (sometimes) not so trustworthy. But even with some dubious figures, a dividend yield of more than 10% and LTV ratios improving nicely seem intriguing. Only a 7% yield outperforms money market rates, with considerable capital appreciation also a possibility.
The South African property market is facing many challenges at the moment; expropriation without compensation, high emigration figures, broad-based corruption, alleged unethical management, etc. These challenges together with a world that is moving into an online age and moving away from “bricks and mortar”, are painting a dim picture for REITs in general.
But that is only when you look at half of the picture. With most difficult situations, if you take advantage, there are great opportunities. An important thing to bear in mind is that property is not homogenous. Just because malls are empty and residential housing prices are falling, it does not mean that property (as a whole) is a bad investment.
It is for these reasons that we are quite optimistic about certain areas within the property sector. Many types of properties, as mentioned earlier, are future proofing themselves and looking to benefit from this new way of living. And, because of recent developments, these REITs look relatively cheap for the potential they are offering.
So, in conclusion, there might still be quite a bit of “toil and trouble” for many REITs that tends to cling to outdated property types. But many companies and new developments are embracing the new technologies and lifestyles of their target market, and they should not be overlooked.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
The content of this article is for information purposes only and does not constitute an offer or invitation to any person. The opinions expressed are subject to change and are not to be interpreted as investment advice. You should consult an adviser who will be able to provide appropriate advice that is based on your specific needs and circumstances. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable and given in good faith, but no representation is made as to their accuracy, completeness or correctness.