Great times can’t continue for JSE-listed real estate companies – top economist
Beware: property shares are set to head for a performance dip. The recession will most likely take its toll on the income streams of real estate companies listed on Johannesburg’s stock exchange. That is the message from property consultancy Rode & Associates on the back of a string of respectable reports released by South Africa’s listed property companies.
Redefine Properties (JSE: RDF) – recently consolidated with ApexHi and Madison and making an appearance in the Global Property Research (GPR) 250 index and Mid Cap segment of the MSCI Global Standard index – was the latest, reporting on Wednesday a total return of 13,9%.
Redefine pointed out it had outperformed the total return of the SA Listed Property Index (SAPY) (12,7%) and the All Share Index (Alsi) (-6,8%) over the same period, even though the total distribution (56,55 cents per linked unit) was “a marginal decrease” on the total distribution (56,63 cents) for the previous year. Redefine CEO Wolf Cesman said the distribution of 11,75 cents per linked unit is marginally higher than the forecast 11,7 cents as contained in the revised listing particulars issued in March 2009.
Cesman acknowledged recessionary conditions would affect his operation, but he still expects next year’s performance to be better.
He said: “Savings in property management and administration expenses and interest on borrowings may take longer to realise than was originally anticipated, and together with the effects of the global economic recession, the board anticipates that the total distribution for the year ending 31 August 2010 will be between 68 cents and 71 cents per linked unit, an increase of between 20% and 25% on the distribution for 2009.”
A rosy outlook has also been painted for Growthpoint Properties Ltd (JSE: GRT), another of South Africa’s biggest listed property companies. Earlier this month, when announcing plans to be the first listed real estate company to explore raising funds through the Commercial Paper market, Growthpoint’s financial director Stuart Snowball said the company’s Moody’s rating reflects its “strong market position as the largest property loan stock company in South Africa”.
“It also points to the size and quality of the company’s property portfolio which benefits from an active internal property management team and produces a solid, recurring rental income stream underpinned by medium- to long-term leases, contractual annual rent escalation clauses, low vacancy rates, and a diversified tenant base,” he said.
“The stable outlook on the Baa2 Issuer Rating reflects Moody’s view that despite a weakening economic climate in South Africa, Growthpoint will continue to produce steady revenues and operating profits,” said Snowball.
Analysis by Rode is less cheerful. The consultancy says there are poorer distribution prospects for South African listed property companies. Income streams have been growing, but “conditions at ground level” are likely to take their toll.
Rode economist John Lottering said over the three months from July to September 2009 the yearly growth of income streams from property loan stock funds still managed to average roughly 10%‘, however rising voids – tenants closing shop or downsizing, and thereby requiring less space – means a direct loss of rental income to the listed funds.
“Also, tenants are naturally only too aware of stalling turnover growth, and those who are about to enter into new contracts are aware of their increased rental-bargaining power. This could mean that some landlords – especially owners of shopping centres – will be under duress to offer rental concessions,” he said.
Listed property companies are big investors in shopping malls where rental growth has, as Rode said, “fallen off a cliff” (see Rode graphs below).
More upbeat is Catalyst Fund Managers. Choose your property company with care, and you can’t go wrong, is its message. Over the long term, the total return from listed property will be driven by the income, plus the growth in that income.
In its October report, Catalyst said: “The prospect of property income growth from the SA listed property sector appears relatively intact. Income distribution growth will continue to be driven by contractual rental escalations and positive rental reversions
(albeit lower than in previous years).
Risks to distribution growth will be an increase in vacancy levels and higher borrowing margins, although this may be offset by lower base lending and swap rates, said the property analysts at Catalyst.
They said, looking at the large range of total returns for SA listed property companies, that the “ability of property companies to maintain sustainable and high quality income distribution growth will be a key differentiator in terms of property company ratings and total return performance”. Write to: jackie@realestateweb.co.za
Catalyst’s number-crunching:
