Investors rotate into offshore property stocks as relentless load-shedding and a stuttering economy dim SA’s growth outlook.
JSE property stocks that generate 100% of their earnings offshore are back on the sector’s leader board, reversing some of the hefty losses recorded last year. That’s despite concerns about tightening lending conditions and higher debt funding costs in the UK, Europe and US.
The recent bank failures in the US have underscored this. A look at the listed property sector’s top performers so far for 2023 shows that seven out of the 10 winners are rand hedge counters, all of which have notched up double digit returns in the year to April 18. In contrast, the sector’s 10 worst performers are all South Africa-based stocks with total returns of between -7% and -23% . That compares with the South African listed property index’s overall total return of about -3%. The winners include UK-focused Industrials Reit, Hammerson and Shaftesbury Capital; German and UK business park owner Sirius Real Estate; and East European plays Nepi Rockcastle and MAS Real Estate . The only three South Africa-focused stocks in the top 10 — Attacq, Fortress A and Indluplace Properties — were boosted by major deals and corporate action.It’s not difficult to understand why local real estate investment trusts are now lagging their offshore counterparts. In the latest issue of “The Navigator”, Anchor Capital’s quarterly asset allocation and strategy report, chief investment officer Peter Armitage points to a barrage of negative factors weighing on local investor and consumer sentiment. These include higher inflation and interest rates, extreme load-shedding, an increasingly tricky sociopolitical environment and a substantially weaker rand.The report reads: “The prospects for South African property companies have worsened of late, with interest rates rising ahead of expectations and load-shedding increasing the costs of a tenancy. The challenged outlook is reflected in share prices trading at average discounts to book NAV of [about] 30%.” Higher interest rates have also resulted in alternative income-yielding assets becoming relatively more attractive. Anchor’s view is that a reasonable-quality diversified portfolio of South Africa-domiciled Reits should deliver low single digit growth for the next few years. As a result, Anchor is now underweight local listed property with a projected 12-month total return of 8% . That compares with a 10% and 11% total return forecast for bonds and general equities. The listed property sector’s forward distribution yield is close to 11%, so Anchor’s 8% total return implies flat to slightly negative share price growth over the next year. Anchor is slightly more bullish about global Reits, with a forecast total return of 6% vs 4% and 8% for bonds and general equities. The report notes that profit growth in Eastern Europe, which dominates the JSE’s foreign real estate jurisdictions, still looks “reasonable”. However, the impact of the Russia-Ukraine war remains uncertain despite the positive effect on neighbouring countries, Poland in particular, that have benefited from millions of people flowing over the border from Ukraine.“We expect the trend of outperformance among the offshore counters, as well as local defensive counters, to continue over the next six months,” he says. Meanwhile, load-shedding and its effect on local companies’ operating costs and the financial health of their tenants will remain top of mind for investors. In terms of offshore stock picks, Tilly says that at current share price levels Sesfikile likes MAS, Nepi Rockcastle and Shaftesbury. He believes MAS and Nepi Rockcastle will both benefit from strong organic growth still coming out of Central and Eastern Europe. “Disposable income in the region is being supported by wage inflation, which in turn is driven by very low unemployment levels,” he says. Tilly adds that indexation will be a major contributor to earnings growth for MAS and Nepi Rockcastle in the short term. Despite a strong share price uptick in central London-focused Shaftesbury , Tilly believes the company still offers upside. He notes that the return of tourists from Asia and the Middle East to London has driven a strong recovery in spending in Shaftesbury’s West End portfolio, which includes iconic work, live, shop and play precincts such as Covent Garden, Carnaby Street and Chinatown. “While higher bond yields pose a risk to valuations, rentals are about 10% below pre-Covid levels and will support valuations, in our view,” he says. Sirius is another rand hedge property stock that’s back on investor radars after the share price crashed by almost 50% in 2022. The company, which is listed on both the LSE and the JSE, owns and operates 140 branded business and industrial parks worth €2bn, split 75/25 between Germany and the UK. The company provides conventional office, warehouse and manufacturing space on long-term leases to larger blue chips, as well as smaller, flexible work and storage spaces let for shorter periods to SMEs and one-man bands. Last week the company released a solid trading update for the year to end-March. Despite the more challenging economic backdrop amid higher debt funding costs, Sirius achieved an overall 8.1% increase in its rent roll . Brendon Hubbard, portfolio manager at ClucasGray Investment Management, says it’s the ninth consecutive year that management has been able to grow rentals more than 5%. He believes Sirius is heavily undervalued at current levels of just more than R17. Though the share price is up 30% from its end-September 2022 lows of R13, it’s still way below end-2021 peaks of R30, and places the stock at a 20% discount to NAV. Sirius’s operating platform offers to the property letting market what booking.com and Airbnb offer to the travel industryHubbard says Sirius should in fact be trading at a 20% premium to NAV. Apart from higher rates hitting Europe-focused real estate companies especially hard, he ascribes Sirius’s large discount to the company’s operating platform not being included in NAV calculations. He says the latter is Sirius’s most important asset and key to why it’s so successful in sweating assets and continuously growing rental income. “Sirius’s operating platform offers to the property letting market what booking.com and Airbnb offer to the travel industry. So it doesn’t make sense not to include it in the valuation,’’ he says. Hubbard expects Sirius to deliver earnings growth of about 20% for the year to March, which places it on an attractive forward earnings yield of 9.6% . London-based Panmure Gordon Securities last week confirmed a buy recommendation on Sirius, highlighting management’s debt refinancing successes and active capital recycling strategy as major positives. An investor note says that though Sirius’s cost of debt is up slightly over the past year it’s still low at an average 1.9%. In addition, 90% of the group’s debt has a maturity of more than three years. Panmure expects dividend payouts to increase by about 23% for the year to end-March. It has placed an LSE target price of 96p on Sirius, which represents a 26% increase on the 76p at which the stock was trading late last week.
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