Time to consider buying property shares again

By Amelia Morgenroodt Time of article published Jun 10, 2019

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JOHANNESBURG – For a long time, listed property generously contributed to provide investors with above-inflation returns. Listed property was the best performing asset class for more than a decade, and it was almost unthinkable to exclude it from a diversified investment portfolio.

The problem is, however, sometimes specific share prices go too high, too quickly. Then the correction takes place, and prices sometimes go too low. These events are usually smoothed out over the long term, and although listed property is back where it was in 2015, investors in the listed property index still trebled their money over the past ten-year period.

It might be time to consider buying property shares again, and under the current circumstance where future economic conditions are impossible to forecast, the more stable property companies are worth consideration.

Growthpoint Properties Limited is the largest property investment holding company listed on the Johannesburg Stock Exchange, with a portfolio of approximately 450 directly owned properties in South Africa valued at almost R80 billion. The most well-known is the 50 percent stake in the V&A Waterfront. Growthpoint is included in the JSE Top 40 Index, being the 21st biggest company.

The groups combined property assets are valued at R133bn, of which 28 percent by book value is located offshore. They own and manage a diversified portfolio of offshore properties, among them 57 in Australia and 48 properties in Poland and Romania.

Growthpoint operates in a highly competitive environment, which places increased pressure on rental growth. Given these headwinds, no growth is expected from the South African portfolio. The group, however, expects the quality and diversity of its South African real estate assets, paired with its investment in the V&A Waterfront, to support the sustainability of local earnings.

Property fundamentals in Australia and Eastern Europe are more stable, and the group is well positioned for growth following accretive developments and acquisitions. Given the favourable fundamentals, management intends to increase its offshore asset allocation.

The balance sheet strength is high, with an ample debt headroom. Australian-listed Growthpoint Properties Australia is well positioned for growth following the accretive acquisitions and lowered debt costs.

The quality of tenants is high, and the near-term expiries are manageable. The office and industrial sectors are outperforming with industrials gaining from growth in online spending and fringe office markets supporting growing cities. The group continues to seek well leased and well located commercial real estate assets.

Growthpoint is the leading office landlord in Central-Eastern Europe with a portfolio of 2.5bn (R42.27bn) in Poland and Romania, with modern assets and excellent environmental credentials and prime locations in key cities. The group has established blue-chip and 76 percent multinational tenants.

The Growthpoint share price seems to be fairly valued, trading at a slight discount (6 percent) to its net asset value. The current distribution yield of almost 9 percent is enticing, well ahead of its long-term average and is guided to grow by 4.5 percent in the current year. The weak South African property fundamentals are fairly reflected in the current share price. Growthpoint has solid management, good corporate governance, and a 15-year record of uninterrupted dividend growth.

Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. Growthpoint shares are not held personally.


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