Industry association, the South African Real Estate Investment Trust, says the South African real estate investment trust (SA Reit) industry is headed for a re-rating, either this year or next.
“Already the Financial Times Stock Exchange (FTSE)/Johannesburg Stock Exchange (JSE) South African Listed Property Index is out of 2019’s starting blocks with its strongest January performance in more than ten years, outperforming all other asset classes.
“At the end of January, the SAPY was up 9.17%, which is well ahead of the FTSE/JSE All Share Index at 2.69%, bonds at 1.7% and cash at 0.6%,” the association said in a statement published on Wednesday.
Anchor Stockbrokers real estate analyst Wynand Smit explained that most SA Reits had de-rated during 2018 and, should growth expectations start to improve this year, the valuations of SA Reits would be compelling.
A re-rate in the sector would be a big gain this year; however, this would only be possible if the economic outlook improves, if there are positive results from the general elections in May and a reprieve from credit rating agency downgrades, Catalyst Fund Managers representative Mvula Seroto pointed out.
Sesfikile Capital director and portfolio manager Mohamed Kalla added that “being quite conservative in our relative rating and growth expectations, we arrive at a 2019 total return expectation of around 12% for the FTSE/JSE All Property Index.
“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. However, our forecasts point to a more stable 2020 growth outlook, which should result in better re-rating potential a year from now.”
Stanlib analyst and portfolio manager Ahmed Motara said it was too early to call for a material Reit sector rally this year, given the national elections, concerns about Edcon’s future and possibly lower retail rentals are issues to be absorbed by the Reit sector this year.
For 2019, Motara anticipates the income return to dominate the total return picture in the Reit sector, with 2020 expected to see a return to higher total returns as capital return becomes more evident.
Capricorn Fund Managers South Africa representative Howard Penny said he expected this year to be a better year overall for SA Reit returns, after a disappointing 2018.
“The jury is out as to whether the sector could re-rate on a relative valuation level this year, given worries surrounding global rising interest rates, so perhaps the bounceback may have to wait to 2020.”
South African Real Estate Investment Trust marketing committee chairperson and Equites CEO Andrea Taverna-Turisan noted that, with the cost of equity having increased substantially in South Africa, management teams of local property counters would need to focus on the pure property fundamentals of their organisations to ensure the property sector becomes more robust and is better positioned to deliver shareholder value over time.