Download CH AP I KK 10 Listed property: Another year of relatively strong

CH AP I KK 10
Listed property: Another year of
relatively strong returns
A
mid anaemic economic
growth emanating from
falling
commodity
prices,
a
weak
currency, labour unrest and
electricity shortages, the SA
property sector posted another
year of relatively strong returns
in 2015.
The benchmark SA listed
property index (Sapy) achieved
a total return of 8"/,. last year
compared to the all share
index's 5.1°/o, all bond index's 3.9°/o and cash at 6.5%. Despite
outperforming all other asset
classes, last year saw the
lowest annual return since
2008.
Over the past 10 years, Sapy
has achieved an annualised
return of 17.5%, 340 basis
points more than equities. Last
year, the best performing
counters in the Sapy were
Fortress B (+100%), New
Europe Property Investments
(Nepi) (+62%) and Rockcastle
(+50%). On the opposite end,
Attacq (-17%), Rebosis (-12%)
and Growthpoint (-107,,)
underperformed. Given the
sharp devaluation in the rand
relative to developed market
currencies such as the USS,
euro and pound, SA
underperformed all major
developed real estate
investment trusts (Reit)
markets. The rand weakened
by 34% during the period. □
Market recovery
In December, a credit
downgrade, and a change in
MARKET CAPITALISATION OF
THE SECTOR
Rbn
700,000 600,000
500,000
m
400,000
300,000
200,000
^.llllllll
04 05 06 07 08 09 10 II 12 13 14 15
SOURCE: BLOOMBERG
SA's finance minister led to a
breakdown in confidence and a
broad-based sell-off in SA
assets. Prior to this, for the year
to November, the property
sector had achieved a total
return of 15%.
However, the sector
recovered relatively quickly
form the December sell off to
deliver a total return of 10.1%
in the first quarter of 2016,
eclipsing equities, bonds and
cash. Rising short term rates
had little impact on investor
appetite, which was instead
supported by a rebound in long
bond yields, falling swap rates
and another strong results
season.
On a global basis, the sector
outperformed larger Reit
markets in the first quarter
despite the rand having
strengthened against all major
currencies (aside for the
japanese yen).
J Sector returns compared
The physical property market
delivered an ungeared total
return of 13.5% in 2015, an
increase of 50 basis points from
2014.
The income return
remained steady at 8.7%, while
capital growth ticked up to 4.4%
- up 40 basis points year-onyear.
At a sector level, retail
property was the top performer
with a total return of 14.3% in
2015,
marginally
outperforming industrial at
14.2%. The office sector
continued to underperform,
albeit with a still-respectable
12% total return. The later was
helped by a healthy income
return of 9.8%.
The vagaries of the
macroeconomic environment
have constrained consumer
demand and also curtailed the
expansion plans of retailers and
corporates. Growing caution has
in turn resulted in a delay in
decision-making over the
renewal of leases and take-up of
new space. Coupled with an
expected increase in supply
across most of the various subsectors, we believe it will
continue to be a tenants'
market.
landlords will increasingly
have to be more flexible in their
rental negotiations, as keeping
their occupancy rates stable will
be the key priority.
_l Retail market
Though the retail sector has
showcased its resiliency over
the past few years, key
indicators suggest deteriorating
conditions. We expect demand
from national retailers to soften,
despite stated planned space
growth of 57o-7%. In the past,
expansion plans of domestic
retailers formed the
predominant trend in the sector
and this had an important
influence on the demand for
retail space.
This predominance is
belaboured by the fact that
70%-80% of all space in major
and medium-sized centres is
occupied by national retailers.
Tenants are also leasing smaller
and fewer but better-located
stores. We understand that
Edcon is also reducing its
footprint, with high profile
stores such as Killamey Mall
having already shut down. J
Office market
Absorption rates in the office
sector are currently matching
new supply. We attribute this to
a preponderance of precommitment on new
developments (72%). Office
vacancies in SA were
unchanged at the end of the
third-quarter 2015 at 10.6%.
Discussions with landlords
suggest that asking rentals on
existing space are still flat or
declining.
The lack of business
confidence — which is leading
to lacklustre employment
growth and real fixed
investment — continues to
hamper the demand for new
office space. Landlords say
conditions on the ground are
the worst on record.
Consolidation and the shift to
increasingly efficient workspace
planning remains a structural
trend in global office space.
Despite the challenges facing
the SA economy, the industrial
sector enjoys low vacancies
across all formats. At the end of
|une 2015, the vacancy rate as
recorded by IPD was 4%,
unchanged from 2014 levels,
though vacancies in smaller
boxes of 2,500 m' - 5,000 m'
rose steeply by 390 basis points
to 4.8%. Industrial rental
growth as recorded by Sapoa
was an annualised 4%. J
Mergers & acquisitions
With interest rates expected
to rise further and fixed funding
costs already on upward
trajectory, some Reits will get
priced out of the acquisition
market in 2016. In our view,
selling yields will only reflect
higher funding costs over a
prolonged period as sellers
gradually alter expectations.
Reits still active in selling their
weaker assets may find
transactions more difficult to
close as we believe the overall
buyer appetite for secondary
assets will wane.
Though gearing levels have
generally increased,
management teams have largely
put in place sound hedging
DISTRIBUTION GROWTH PER
ANNUM (2002-2015)
02 03 04 05 06 07 0B 09 10 11 12 13 14 15
SOURCE: COMPANY DATA. AVIOR CAPITAL MARKETS
strategies as they are cognisant
of interest rate risk. The
LONG-TERM
B SAPY
PERFORMANCE ■ ALSH BY ASSET
CLASS ■ albi
m
1 year
■10
3 years 5 years 10 years
SOURCE: BLOOMBERG
average proportion of debt
which has been fixed/hedged
for SA Reits under our coverage
is 80°/<>. However. Reits will not
be immune to a higher interest
rate environment, as the costs
of interest rate swaps have also
increased, implying higher
hedging costs ahead. □ Rest of
Africa
Africa is likely to remain
small for SA property funds in
absolute terms, but
nevertheless offers the most
acquisitive and development
growth potential. The recent
commodity price instability has
had a negative impact on
economic growth, financial
resources, and income
distribution. However, the longterm picture remains
favourable. According to |LL,
there are 15 established fund
platforms and over USS2bn in
equity committed to date.
Regardless of economic
pressures, the SA property
sector is poised to grow
dividends by about 8% in 2016
and offers an attractive initial
yield of 7%.
Naeem Tilly Property analyst,
Avior Capital Markets