Market Review

The FTSE/JSE SA Listed Property Index (SAPY) delivered a total return of -19.6% during the three months to the end of March 2018, mainly due to company-specific concerns. Relative to other asset classes, the SAPY materially underperformed equities (FTSE/JSE All Share Index: -6.0%; cash: 1.8%; bonds: 8.1%) over this period. On a rolling 12-month basis, the sector’s total return is -7.1% due to the negative first quarter of 2018.

Due to the idiosyncratic nature of the SAPY’s performance for the year to date, the typical correlation between property stocks, government bonds and the forex market has broken down.

The best-performing shares in the SAPY for the quarter included the likes of higheryielding domestic mid-caps such as Accelerate, Arrowhead and Emira, as well as larger caps such as Growthpoint and Redefine, all materially outperforming the index with returns of between 5% and 15%. The rallies in these domestic names were driven largely by the change in the SA presidency, which in turn drove our local bond yields lower and the rand stronger. Of the rand hedges, Echo Polska also rebounded this year (about 10%) after its sell-off in 2017 on news of a director being arrested.

By contrast, the worst-performing shares in the quarter (which drove the average index down close to 20%) were the shares which were by far the best performers in 2017. Their sell-off was very dramatic, offsetting all the previous year’s gains and more. The derating of Resilient, Fortress, Greenbay and NEPI Rockcastle - on concerns that these property counters entered into off-balance sheet loans, crossholdings between the entities, possible insider trading, and aggressive capital raising at high multiples - explains the decline in the SAPY index. A rough estimate is that the SAPY would have delivered a return of about 3.5% excluding the four companies in question.

While there may be merit to the above concerns and hence a sell-off in these shares were justified, perhaps it has taken these particular shares, but also the average index with it, from one extreme (overvaluation) to the other (undervaluation).

Performance and actions

The quarter was very quiet on the corporate action front. With the March 2018 FTSE/JSE SAPY rebalance there were no additions to or deletions from the index, but the weightings of MAS Real Estate and Echo Polska increased while Resilient decreased in the index. The one-way turnover came to 0.7%.

Your fund outperformed its benchmark slightly mainly due to cash holdings in the portfolio (strong down market).

Outlook

Following the weak first-quarter returns, the SAPY derated from a 6.8% clean forward yield at the end of 2017 to well over an 8% clean forward yield, with a twoyear expected growth in dividends of about 7% p.a. and, in our view, longer-run growth in the CPI range of 4 - 6% p.a. This yield is now, for the first time in quite a while, at a discount (i.e. above) the SA long bond yield, which has rerated to around 8%.

At a macroeconomic level, a further 25-basis point cut (50 basis points over the past year) in domestic interest rates also benefits the sector. Indirectly this makes other competing asset classes, such as cash and bonds, less attractive for investors, which could lead to increased demand for riskier assets such as property and general equities.