A bounce back in listed property share prices in the fourth quarter of last year continued into the new year as the market became more convinced inflation was under control and that interest rates would begin to decline a few times in 2024.
However, by December 20, the South African Listed Property Index (SAPY) was still below pre-Covid levels, according to the latest Rode’s Report on the South African Property Market.
This suggested that the large drop in property share prices earlier in the year was probably overdone, the report said. Share prices of many Real Estate Investment Trusts (REITs) bounced back in November and December. The SAPY had risen by about 10% to December 20, compared to the end of the third quarter of 2023.
By Friday, according to Business Report’s own research, the index was 19% ahead of a low point that it had reached on October 26, last year.
However, even with the recovery to December 20, the index was still at about the same level as at the end of 2022 and 13% below pre-Covid levels.
The Rode’s report’s authors also cautioned that interest rates remained elevated and had not yet fallen, and forecasts could change quickly, especially with two wars still ongoing.
The level of the index reflected the challenges facing the property sector such as electricity, high interest rates, fast rising operating costs (including rates & taxes) and poor municipal service delivery, as well low growth in the global and South African economies.
Above-average vacancies and subdued rental growth were still prevalent in the office and retail segments, implying that it would take a few years for the sector to recover fully and dividends to reach pre-Covid levels, the report said.
The industrial property market continued to perform comparatively better. “All this means is the ratings of REITs are still poor, but somewhat better than a quarter ago,” the report said.
Returns from the REITs had mostly disappointed in the first 10 months of 2023. Several REITs reported a loan-to-value (LTV) ratio above 40% by year-end. Accelerate had the highest LTV, and as a result, its board approved asset sales of R1.1 billion and a R300 million rights issue to reduce its debt.
REITs had generally tried to lower distribution or payout ratios to boost liquidity through the year, but some paid out all their distributable income, such as Safari and Stor-Age, the report said.
“REITs reported during the latest set of financial results that operating conditions remain tough due to the impact of load shedding, rising operating costs, subdued economic growth and elevated interest rates. No wonder dividends are not back at pre-Covid levels, while LTV ratios are worryingly on the rise for some REITs,” the report’s authors noted.
Asset sales were likely to continue in this environment, pushing up capitalisation rates of directly held properties. The ratings of REITs remained poor, but were somewhat better than a quarter ago, the report said.
Among the better performing REITs, Stor-Age recorded distribution growth of 2.2% in the half-year ended September 2023, slower than 6.1% growth a year ago. However, its dividend was 11.8% higher than 2019 levels − “an impressive feat, given the destruction seen elsewhere”, the Rode’s report authors said.
They said the self-storage market had proved resilient, with Stor-Age reporting strong “same-store” rental income growth of 17.7%, driven by growth in SA, while tenants were also leasing space for longer.
The company’s LTV ratio was also relatively low at 32%, giving it one of the healthiest balance sheets in the listed property sector. Its vacancy rate improved slightly to 10.9% from 11.2% in the half-year, driven by an improvement in SA to 9.4%, while its UK vacancy rate roughly doubled to 16.1%.