South Africa’s real estate investment trust (SA REIT) sector is heading for a re-rating and the big question is whether it will rally this year or next.
Already, the FTSE/JSE SA listed property index (SAPY) is out of 2019’s starting blocks with its strongest January performance in the 10-plus years since 2007, outperforming all other asset classes.
At the end of last month, the SAPY was up 9.17%, well ahead of the FTSE/JSE all share index at 2.69%, bonds at 1.7% and cash at 0.6%.
Most SA REITs de-rated last year, but Wynand Smit, real estate analyst at Anchor Stockbrokers, believes should growth expectations start to improve this year, the valuations of the SA REITs are “compelling”.
However, this will only be possible if the country sees an improvement in the economic outlook, positive results from the 2019 general elections, and a reprieve from credit rating agency downgrades, cautions Mvula Seroto of Catalyst Fund Managers.
Sesfikile Capital predicts a “conservative” growth expectation for this year should be about 12% for the FTSE/JSE all property index, says Mohamed Kalla, director and portfolio manager.
“The main driver is the attractive - on a relative and absolute basis - initial forward yield and does not factor in a significant re-rating relative to bonds in 2019.”
He adds the group’s forecast points to a “more stable” 2020 growth outlook, “which should result in better re-rating potential a year from now”.
Despite these forecasts, Stanlib analyst and portfolio manager Ahmed Motara believes it is too early to call for a material REIT sector rally in 2019, given that the elections in May, Edcon concerns and possibly lower retailer rentals are issues to be absorbed by the sector this year.
Therefore, for 2019, he anticipates the income return to dominate the total return picture in the REIT sector, with next year expected to see a return to higher total returns as capital return becomes more evident.
While the jury is still out as to whether the sector could re-rate on a relative valuation level this year, Capricorn Fund Managers SA’s Howard Penny still expects this year to be a better one for SA REIT returns after a “disappointing” 2018. “Given worries surrounding rising global interest rates, perhaps the bounce back may have to wait for 2020.”
With all this in mind, Andrea Taverna-Turisan, SA REIT Association marketing committee chairperson, says: “With the cost of equity having increased substantially in South Africa, management teams of local property counters will need to focus on the pure property fundamentals of their organisations to ensure the property sector will become more robust and better positioned to deliver shareholder value over time.”
The SA REIT Association represents South Africa’s R330 billion listed REIT sector. Its members comprise all the country’s listed REITs, which play an essential role in the economy.