The two best performing Real Estate Investment Trusts (REITS) in the first two months to 2023 were Attacq and Emira and the returns from other REITS were mostly negative, according to the first issue of the Rode’s Report on the South African Property Market (RR) for 2023.
Listed property started 2023 on the back foot, with the total return of the SA REIT Index a negative 4.7% over the first two months of 2023.
This meant listed property performed worse than the other asset classes, with equities performing the best out of the asset classes with a 6.5% total return in the first two months.
Listed property only delivered a 1.5% return in 2022. Stronger equity returns were due to a rise in risk appetite following signs that the top of the interest rate cycle was near amid cooler inflation, and the reopening of China after three years of Covid-related lockdowns.
The Rodes Report said yesterday that recent financial results for the period to December 31 generally looked better, especially for REITs exposed to retail and industrial property.
“The oversupplied office market remains a drag on the results of REITs and other funds that are heavily exposed to this sector.”
While the office market remained challenging due to oversupply, the Rode’s data showed vacancy rates had moved to lower levels, and nominal Rode’s data on market-rental growth had also picked up from a low base.
“That said, REITs are still generally reporting large negative rental reversion rates as rentals have escalated by much more than market rentals. The outlook for the office market is clouded by the poor economic outlook and the remote-working trend, with hybrid working models proving popular.”
The report said Attacq delivered a total return of 15.6% in the first two months, having declared a dividend for the second half of 2022 after none in the same period a year ago, and after its income was boosted by much better retail results, notably at the Mall of Africa in Waterfall City.
Attacq’s share price was also boosted by news that the Public Investment Corporation (PIC) will acquire a 30% stake for R2.8 billion in its subsidiary Waterfall Investment Company.
“Listed property that struggled the most were Accelerate, Delta and Texton. The total returns delivered by funds in 2022 show a mixed performance in comparison to 2021, when the sector staged a good recovery from its Covid lows,” the report said.
The retail sector staged a strong comeback in 2022, and this was reflected in the retail company results, with shopping centre vacancy rates heading lower and rental reversion rates less negative or even positive in some cases.
Dividend growth for most REITs was generally below inflation and still well below pre-Covid levels. Some REITs also withheld dividends to preserve capital, such as Texton and Hyprop.
The report said there were outlier REITs with dividends already above pre-Covid levels, such as logistics focused Equites, Stor-Age and retail player Safari Investments.
Many funds had brought loan-to-value ratios under control to under 40%, for example by selling assets. Lower distribution or payout ratios also boosted liquidity.
“For example, Growthpoint and Attacq’s payout ratios were just above 80%. Before the pandemic, payout ratios of close to 100% were the norm, which made listed property an attractive asset class for pension funds and life insurance companies – not least because rental distributions to these funds are not taxed,” he said.
For REITS to retain their status, they must distribute at least 75% of their rental income, provided they are solvent and liquid.
Emira, a diversified REIT, boasted an above-inflation distribution increase of 17.4% in the half-year to December 3, compared to the second half of 2021, but its distribution was still 10% lower than in 2019, before Covid.
Its South African (SA) industrial and retail portfolios performed better, with vacancies low at 2.6% and 3.4%, respectively. Its office vacancy rate fell to 11.6% from 18.2%.
Emira also has exposure to the US, where it is invested in 12 open-air shopping centres. Its American portfolio performed better than its SA portfolio.
Emira’s share price on April 4 still traded at a 40% discount to net asset value of R16.95 per share. Its loan-to-value (LTV) ratio rose to 43.1% from 41.8%, partly due to a bigger stake in residential fund Transcend. Emira’s dependence on Eskom electricity had steadily declined to 78% of its total energy consumption compared to 100% in the half-year ended December 2019.
Growthpoint, the largest and very diversified SA REIT, saw its distribution recover by a further 4.6% in the half-year ended December 2022, but it was still about 40% below the pre-Covid level of 2019.
“Growthpoint continues to see green shoots in its local retail and industrial portfolios. Its vacancies in its core retail portfolio (without offices) improved to 3% from 3.8% a year ago. Its retail portfolio was valued 1.9% higher,” the report said
Growthpoint’s industrial vacancy rate fell to 4.3% from 6.5%. However, its industrial renewal success rate decreased sharply to 51%.
Growthpoint’s share price on April 4 was trading at a 37% discount to its NAV of R21.10 per share.
The South African Listed Property Index (SAPY) was 5.3% lower by the end of March compared to the end of the first quarter a year before.
Locally, the power crisis was a large negative factor. This was after share prices had fallen by about 7% in 2022.
At the end of March 2023 share prices were still roughly 17% below the level that prevailed at the end of February 2020, just before Covid19 emerged in South Africa, which implies the sector had lost further ground.