Real estate shares have shown their resilience
Before Brexit and signs of structural change in the European retail property market, these shares have traditionally been firm favourites of South African investors and investment funds, because of the exposure to prime properties in Europe and in the UK, and their consistent income-generating capabilities.
Online shopping, a financially weaker UK consumer, and difficulties among some of the key store chains have dramatically altered the trading environments for these groups - income for distribution, property valuations and ultimately share prices have all fallen dramatically over 18 months.
Intu, Hammerson and Capital & Counties (Capco), all with substantial property investments in the UK, came under selling pressure last week, but then rose well on Friday.
Hammerson fell 5.48percent on Thursday, but was up 4.03percent to R48.77 by Friday afternoon.
Intuprop was down 2.9percent to R7.69 on Thursday, but was up 4.12percent at R8.09 on Friday. Capco fell 1.61percent to R39.72 on Thursday, but was up 0.6percent to R40.46 on Friday.
Capital & Regional, which has a secondary listing on the JSE, was a notable outlier, in spite of reporting slightly lower interim income distribution during the week, as its share price was up 11.1percent to R3.70 on Thursday, and then up another 2.43percent on Friday, bringing its share price gain to more than 43percent over a week.
Driving its share price rise was the announcement that South Africa’s biggest real estate investment trust Growthpoint was in discussions to acquire a majority stake in Capital & Regional.
Although smaller than its other listed peers with an £800million (R14.54billion) portfolio, Capital & Regional management said it was in a better space in the UK shopping centre market than some of its peers.
Its centres are closer to where people live, there is a focus on a more people friendly approach (such as a crèche for shoppers at one centre), and it is trying to let first to stores that do not sell products that require a high disposable income from buyers.
Gearing is at 52percent, but a proposed cash injection from GrowthPoint, reckoned to be part of the acquisition price, will reduce that.
Investment in the UK property market fell by a third in the second quarter of this year, according to some online reports, as some investors adopted a wait-and-see attitude and due to a drop in demand from overseas buyers, notably from Asia.
These companies have not been slow to change. Hammerson’s interim adjusted profit came in 10.5percent lower at £107.4m, the half-year dividend was maintained, and while its gearing is at 69percent, it is working hard to dispose of assets through 2020, specifically its UK retail parks, to strengthen its balance sheet.
Capital & Counties’ half-year earnings fell only slightly at half year, buoyed by its two key central London portfolios, which it plans to run as separate businesses through a demerger of Covent Garden later this year, while the other unit EC Properties will aim to optimise its Earls Court land interests over time.
Intu, the owner of nine of the top 20 shopping centres in the UK, reported lower half-year earnings, and announced a five-year strategy for “radical transformation,” with a key focus being to strengthen balance sheet.
Debt to assets was at 57.6percent.
These groups are still in sound financial shape and the managements have taken action to address the challenges. One can't help feeling that their share prices may have been oversold.
You can't try on new clothes, check in a mirror to see if you like it, or ask an assistant for a measurement, or assess the freshness of vegetables, by clicking on-line.
Stores and shopping centres are evolving, they won’t be going away.
Locally, GrowthPoint, the JSE’s biggest real estate investment trust, surprised by lifting distribution income 5.3percent slightly ahead of guidance last week, in a particularly weak South African property market, and announced plans for further internationalisation.
Its big risk is a further downside in the South African economy.
But the share price has treaded relatively steady this year - it traded at R23.12 on Friday - reflecting undoubtedly its continued ability to ride out tough conditions.