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Despite losses, listed property still offers value in pockets

09 July 2020 Old Mutual Wealth

Investors reassessing the balance of their portfolio in the wake of COVID-19 will have been struck by the diminishing prospects for the listed property sector, which up until recently had been a darling of the market.

Tasneem Samodien, a Research Analyst at Old Mutual Wealth Private Client Securities, suggests this is a timely wake-up call for investors to realign their portfolios with the sector’s new reality.

“As we transition to an increasingly digital world, where working from home, e-sports, e-commerce and online education become the new normal, our investment in property as an asset class needs to take this shift into account. We cannot continue to invest in traditional real estate as if it is immune to technological advancement,” she says.

She says COVID-19 is a timely wake-up call for investors to realign their portfolios with the sector’s new reality. “The crisis has highlighted the risk of investing in the ‘market’ as opposed to investing in selected companies. This active investment approach requires more work, but is more likely to help investors attain their investment objectives.”

Listed property on the Johannesburg Stock Exchange had enjoyed a stellar run since 2008 as demand for retail, commercial and industrial space rose. This growth was supported by several real estate investment trusts expanding their portfolios internationally, offering a local rand hedge option to investors.

Those heady days are now something of the past, with the South African listed property sector losing 50% of its value in the 12 months to end May 2020.

Samodien says what this statistic masks is the fact that the underlying performance of stocks within the sector vary significantly.

“The pandemic was the proverbial straw that broke the camel’s back as the South African property price index plunged 48% during the two weeks following 5 March 2020. However, companies with limited exposure to oversupplied sectors have performed relatively well,” she says.

Equites Property Fund is one that has held up relatively well during this period. It benefits from longer lease terms and has developed a specialist portfolio of logistics properties that are less affected by the downturn.

Samodien says management has also kept gearing at a relatively conservative level of 26%. While the stock has lost 20% of its market capitalisation over the past 12 months, it is significantly outperforming the market thanks to its narrow focus and stable management.

Another niche property player is South Africa’s sole listed self-storage outfit, Stor-Age, which is down only 6% over the past 12 months.

“What these examples demonstrate is that the coronavirus crisis provides investors with the opportunity to spot companies with poor business practices and avoid or disinvest from them in favour of better quality businesses.

“The current challenges facing the local property sector can be overcome, and management teams now have an opportunity to re-engineer their business models to allow for more sustainable expansion and shareholder returns.”

Their list of priorities should include stepping up property maintenance, disposing or repurposing unprofitable assets and reducing foreign currency debt to more conservative levels.

Samodien says these moves will be needed to ensure the long-term sustainability of these businesses in dramatically changed circumstances.

She suggests that investors conduct proper due diligence before investing in specific property counters. “Measures to evaluate include debt levels, the capital allocation policy for expansion and maintenance, remuneration and incentive policies. Naturally, the quality, vacancies and tenant profiles of properties owned will also determine future success,” concludes Samodien.

“Lastly, investors need to consider the balance of their portfolio and whether it includes sectors with future growth potential. Niche sectors like e-commerce warehousing, datacentres, and telecommunication infrastructure, for instance, are more likely to benefit from favourable demand-supply dynamics.”

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