Nedbank CIB’s team of analysts is spread across global markets and covers various sectors and asset classes. Recently, we’ve expanded our equity research capacity to align with sectors that are important to the CIB franchise. With a key focus on diversified industrials, telecommunications and media, retail, mining and property, our primary objective is to provide investment advice to our institutional investors. With this in mind, we have recently launched an initiative called ‘CIB Fireside Chats’ aimed at relaying some of our analysts’ world-class expertise to a wider audience.
Our first Fireside Chat with Avinash Kalkapersad, Head of Global Markets Research, and Ridwaan Loonat, Senior Research Analyst, explored the unique challenges and outlook faced by the property sector.
Historically, the property sector has always been hailed as a must-have investment for any portfolio. How has the property sector performed relative to other sectors?
Given the diversification benefits that property offers, property is a must for most of the portfolios. However, looking at performance year-to-date and over a five-year period, it hasn’t always been smooth sailing. SAP is down roughly 36%. Compared to the all-share index, down 4% over a five-year period, this equates to a 9% drop. This means that investment-shy consumers would have been outperformers during this period, beating all the asset classes.
The sector started to experience a property sell-off before the emergence of Covid-19. What are the reasons behind this trend?
Property was an outperformer between 2012 and 2017. Early in 2018, valuations in the property sector were riding high. Companies were trading between 20 and 40% premiums. Resilient and associated companies came under investigation for suspected market abuse. These companies were eventually cleared, but the investigations lead to diminished confidence in the sector. With Covid-19 added to the mix, there’s currently not much love for the property sector.
Covid-19 has caused cross-sector upheaval in South Africa. How has the property sector been affected?
Given the fact that non-essentials weren’t able to trade, the property space was hard hit. In terms of retail, 70% of gross leasable area (GLA) is focused on non-essentials. If you’re unable to trade, you’re unable to collect rent. The retail sector has been the hardest hit, as big retailers are holding back on their rentals and negotiating discounts. Fortunately, as lockdown restrictions have been eased, collections have picked up and are ranging between 80 and 85%, depending on the sector. The logistic and storage sectors have been largely defensive.
How will the office sector be impacted?
It’s uncertain exactly in which position the industrial retail sector will find itself post-Covid-19. More people are expressing the desire to work from home, which is understandable. Going forward, most companies will probably choose a balance between home/office operations based on social distancing requirements. Major tenants are not committing to anything at the moment and will most likely reassess the situation in six months’ time. There’s also a sense of companies anticipating the possibility of future pandemics which will dictate their positioning going forward.
How will the supply/demand dynamics around the office sector respond?
Post-Covid-19, the office sector faced the most pressure. One could obtain P-grade office spaces at A-grade rental rates. Going forward, location will be key. Unfortunately, rental growth will be negatively affected due to increased supply.
We can expect to see similar results in industrial and retail rental growth. Further to that we should brace ourselves for negative reversions across all sectors in the next earnings season.
What does a lower GDP number mean for the property sector?
Contraction in GDP is definitely going to be felt in the property space. Based on forecasts, the sector will experience roughly -7% GDP contraction for the year, compared to 2019, when the total return was approximately 9%.
Amidst the negative sentiments, is there an upside for the property sector?
At the moment, the environment is challenging. Companies could start by fixing their balance sheets. M&A activities could prove advantageous, as companies may be forced to dispose of assets to lower their gearing levels. Other than that, batting down the hatches is the best option for the time being.
Is acquisition potential limited to either the domestic or international market?
In this environment, acquisition potential is mostly domestic. With that being said, there is potential for companies with strong balance sheets to acquire companies in the UK, Spain or Eastern Europe. Growthpoint, for example, acquired Capital and Regional in 2019, so offshore acquisitions are not off the cards.
How has the economy opened up in other countries?
Eastern Europe has opened up quicker due to lower infection rates than the rest of the world. Spain, where the likes of Vukile Property Fund has a big share exposure, has taken strain, but is slowly recovering. In terms of bank covenants, Spain and South Africa are faced with similar scenarios with bank covenants being placed on hold for the next 12 months.
What are the key metrics to invest in?
Currently, the main focus is on balance sheet strength, low gearing ability to service your assets, and a defensive portfolio to help companies come out stronger. From a share price point of view, we’ve been hit hard, while from a valuation point of view we’re looking attractive. Historically, we traded at 40% premiums to NAV. Currently, we’re trading at a 50% discount. In that sense, yields are still attractive.
How does the local property market compare to equivalent international benchmarks over the Covid-19 period?
From a valuation point of view, we’re trading at a 50% discount to NAV. International players are trading between 25 and 40% discount to NAV. In terms of storage and logistics, these companies are trading at similar premiums to South Africa.
There isn’t a major difference the way our South African companies are operating relative to our global peers. Vukile Property Fund has broken into Castellana in Spain, which is now the seventh biggest retail region in Spain. This proves that South African property companies are holding their own compared to equivalent international benchmarks.
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