OPINION: Property investors ‘need to tread carefully’
Kundayi Munzara, a director and portfolio manager at Sesfikile Capital, says that listed property is likely to deliver a total return of between 11 and 13 percent in the medium term.
“The sector’s outlook is being impaired by weakening growth prospects coupled with a lack of confidence with respect to corporate governance concerns. Considering the earnings downgrades, some of the recent fallout may be justified, especially considering the headwinds the sector still faces in the year ahead,” he says. “However, given our expected return for the sector, together with the correlation to equities and bonds, listed property should form part of a balanced portfolio.”
He says the retail sector is struggling, because of the oversupply of regional malls and anaemic demand from tenants.
“While companies are recording trading density growth in the low single digits, most retailers have reduced expansion plans and negotiated lower rentals and escalation rates to combat lower growth in sales. The impact of Edcon reducing its footprint has also been felt on the market, with the brand looking to cut its rental bill via a combination of rental reductions and cutting back space. This will come at a cost, as landlords must reconfigure and re-let the space in a weak-demand environment.”
Mark Dunley-Owen, a portfolio manager at Allan Gray, says the current state of listed property is not surprising when looking at how the country’s economic growth has declined because of structural deficiencies.
“South Africa has experienced a property construction boom for much of the last two decades, most notably in retail shopping centres and office nodes such as Sandton. But the weakened economic climate has impacted the demand for space. We expect this combination of rising supply and weak demand to result in lower rentals to keep space occupied.”
Despite the weakened environment, Munzara is seeing value in companies in the listed property sector that have focused specialist strategies, defensive portfolios, high-quality earnings and strong balance sheets.
“The preference for defensive portfolios and strong balance sheets emanates from the weak state of the economic environment, where rental growth and asset valuations are under pressure.”
Dunley-Owen says Allan Gray is seeing value in property companies that are priced below the company’s assessment of intrinsic value, particularly after last year’s correction in share prices.
“We are seeing opportunity particularly in companies that are run by management teams that are aligned with shareholders, use appropriate financial gearing, focus on cash flow rather than accounting earnings, and prioritise long-term value over short-term metrics,” says Dunley-Owen.
For investors who are contemplating investing in listed property amidst this background, Munzara and Dunley-Owen say there are few things to know about getting it right.
“A high initial yield may seem attractive at face value, but inherent tenant risk and financial risks in the companies may be masked by this,” says Munzara. “Back strong management teams that have a track record and experience to deal with the constantly changing dynamics of the property industry, as well as those that don’t underplay corporate governance.”
Dunley-Owen, however, says investors should look out for cases where management teams are misaligned with long-term shareholders.
“Investing in listed property to earn an income encourages management to make decisions that target short-term distribution expectations at the expense of long-term value, for example, refusing to sell low-quality assets because they are high-yielding."