Market Review

The SA Listed Property Index (SAPY) realised a return of -4.4% during the third quarter of 2019. This was against the positive return it managed over the first half of 2019. This three-month performance was in line with that of the FTSE/JSE All Share Index’s -4.6%. Bonds (0.8%) and cash (1.8%) were the only asset classes showing positive returns. On a year-to-date basis, SA bonds were the outperformers with returns of 8.44%, followed by SA equities (7.08%), SA cash (5.45%) and SA property (1.34%). The SA Listed Property (SAPY) and the All Property (ALPI) Indices continue to underperform other asset classes over a rolling 12-month period.

The best performing shares in the SAPY for the last quarter included Sirius (19%), Resilient (9%), Investec Australia (8%) and Liberty 2 Degrees (3%). By contrast, the worst performers were Hospitality B (-16%), Fortress B (-15%), Redefine (-13%) and Mas Plc (-13%).

A key theme prevalent in the retail sector both locally and offshore is the need to consistently invest in your retail assets in order to attract the best tenants with their flagship offering, especially in an environment of oversupply and high mobility of consumers who are spoilt for choice.

The All Property index has underperformed the SA Listed Property index this year due to its larger exposure to the UK and its concomitant Brexit risk, together with its exposure to smaller SA property companies.

Fund performance

The current quarter was again somewhat quiet on the corporate action front, but much busier on the reporting of financial results. During the September 2019 FTSE/JSE SAPY rebalance there was one constituent deletion, namely Accelerate Property Fund, and one addition, which was Stor-age Property Reit. The one-way turnover was somewhat higher than the recent past at 2.5%.

Your fund performed in line with the SAPY benchmark. Any deviations from the benchmark could solely be attributed to cash flows.

Outlook

Following the weak returns for the last 12 months, the SAPY index has de-rated to an interestingly high historic yield of 9.77%. The yield-to-maturity (YTM) on the longterm South African government bond (RLRS) de-rated by 9bps, ending the month at 8.90% (compared to 8.81% on 30 August 2019).

Despite the weak outlook for local property fundamentals and downward revisions to earnings growth over the medium term, should dividends remain intact and growth return over the medium to long term, SA listed real estate remains attractively priced. On average, SA centric companies are trading at forward yields above the long-term South African Government Bond proxy (RLRS).

Market Review

The FTSE/JSE SA Listed Property Index (SAPY) returned a total of 4.5% during the second quarter of 2019 against the 1.5% in the first three months of 2019. This was better than the FTSE/JSE All Share Index (ALSI) return of 3.9%, cash at 1.8% and bonds, which returned a credible 3.8%. For the last six months the SAPY is still lagging most other major domestic asset classes, returning 6% versus 12.2% for equities, 7.7% for bonds, but still outperforming cash at 3.6%.

The best performing shares in the SAPY for the last quarter included Investec Australia (+18%), Fortress A (+17%) and Accelerate Property Fund (+14%). By contrast, the worst performers were SA Corporate (-9%), Attacq (-9%) and Stenprop (-2%).

The South African commercial property market continues to trade in a weak macroeconomic environment with low investor confidence. The office market is still experiencing high vacancy rates across the different sectors of the market area. High vacancy rates are also putting downward pressure on rental escalations, with the Edcon equity deal with landlords earlier in the year setting the scene for a number of negative lease reversions. By way of example, Foschini has extracted rental reductions of some 13% in SA and the rest of Africa.

The FTSE/JSE All Property Index (ALPI) (+2.8%) underperformed the FTSE/JSE SA Listed Property Index (SAPY) (+6%) this year due to its larger exposure to the UK and its concomitant Brexit risk together with its exposure to smaller SA property companies.

Fund performance

The current quarter was again somewhat quiet on the corporate action front.

During the June 2019 FTSE/JSE SAPY rebalance there were no constituent changes. The major weight changes happened in EPP N.V. (+0.8%) and the largest down-weighting was in Growthpoint (-0.4%). The one-way turnover was a very low 1.35%.

Your fund performed in line with the SAPY benchmark. Any deviations from the benchmark could solely be attributed to cash flows.

Outlook

Following the modest return for the last 12 months, the SAPY has derated to an interesting 8.98% trailing income yield, and about an 8.7% clean forward yield - the first time in quite a while that the market is expecting a decline in income 12 months forward. The trailing and forward yields are now at a slight discount (i.e. higher) to the SA long bond yield of 8.1%. This is a good rule of thumb to highlight if there is value or not in the sector, just as US investors may, for example, compare the dividend yield on the S&P 500 Index to US Treasury yields.

The tough current macroeconomic environment will probably put a damper on shortterm returns from the listed property sector.

Market Review

The FTSE/JSE SA Listed Property Index (SAPY) returned a total of 1.45% during the first quarter of 2019 against the -4% in the last quarter of 2018. This was still much worse than the FTSE/JSE All Share Index (ALSI) return of 8% and below that of cash (1.8%) and bonds, which returned a credible 3.8%. For the last 12 months the SAPY materially underperformed all other major domestic asset classes, returning -5.7% versus 5% for equities, 3.5% for bonds, and about 7.3% for cash.

The best performing shares in the SAPY for the quarter included Stenprop (+15.6%), Sirius (10%) and Investec Property Fund (+8.7%). By contrast, the worst performers were Fortress A (-20%), Accelerate Property Fund, also an underperformer during the last quarter of 2018 (-16.7%), and Hyprop (-9%).

The South African commercial property market continues to trade in a weak macroeconomic environment with low investor confidence. The office market is experiencing high vacancy rates across the different sectors of the market. High vacancy rates are facing downward pressure on rental escalations, which are trending close to the inflation rate. Super regional shopping centres are outperforming the market, with mid-tier malls lagging the pocket.

In the industrial sector vacancy rates are presently close to the long-term average. While economic growth is impacting negatively on the sector, demand is being underpinned by the logistics sector and the demand for e-retailing-related space.

Fund performance

The current quarter was again somewhat quiet on the corporate action front.

During the March 2018 FTSE/JSE/SAPY rebalance, Hospitality B was included in the index again, despite being one of the worst shares regarding liquidity previously, replacing the underperforming Rebosis, and the weightings of Redefine and the Equity Fund increased while EMI and Growthpoint decreased in the SAPY Index. The one-way turnover was a low 1.44%.

Your fund performed in line with the SAPY benchmark. Any deviations from the benchmark could solely be attributed to cash flows.

Outlook

Following the weak return for the last 12 months, the SAPY has derated to an attractive 9% trailing income yield, and about a 9.5% clean forward yield. The trailing and forward yields are now at a slight discount (i.e. higher) to the SA long-bond yield of 8.6%. This is a good rule of thumb to highlight cheapness in the sector, just as US investors may, for example, compare the dividend yield on the S&P 500 Index to US Treasury yields. The income yield alone is also over 3.5% higher than inflation expectations, and over 1% higher than cash rates. With the SAPY also likely to show growth in dividends (unlike cash and bonds) at the same level as CPI in the long run (4% to 6% p.a.), the total return spread relative to inflation, cash and bonds looks very attractive.

Further, given the sharp sell-off in 2018, it is possible that investors at these levels also benefit from a rerating of the sector back to about 8% or, in a best-case scenario, a 7.5% yield. One negative, however, over the short term is the recent interest rate hike, albeit small, which affects the finance costs of REITs given their debt gearing. Another negative is the fact that valuations are currently depressed, which makes it difficult for them to do any accretive acquisitions, which has in the past added to dividend growth rates. So, for now, they will have to rely almost entirely on organic growth.