Old Mutual Investment Group's Listed Property Portfolio Manager, Evan Robins, has advised investors to exercise caution despite the listed property sector's unexpected turnaround in the last quarter of 2023, propelling it to become the best-performing sector for the year after being the worst performer the year before.
Notably, by the end of October 2023, the sector had experienced a 7.6% decline, making the subsequent rebound all the more unexpected.
The sector's surprising performance can be attributed to several supportive global factors, according to Robins, who points out that the local environment continues to present several headwinds for the sector, although these were on the improvement side.
Robins says the persistent challenges impacting the sector are broadly blanketed by stubbornly low economic growth, as well as the uncertainty brought about by the upcoming general polls. Furthermore, there is a marked oversupply of office space particularly in areas such Johannesburg, a trend which, according to Robins, predates the COVID-19 pandemic. Robins further adds that the waning demand for office space is a global phenomenon. As a result, the common trend for listed property investors has been the reduction of exposure to the office subsector.
“All these factors, along with the pain from COVID-19, have resulted in the sector experiencing what are now permanently low rental rates. Furthermore, property counters must also deal with their debt (expected to expire in 2025/6), which now has significantly increased interest rates since the take-up of debt,” says Robins.
With this in mind, Robins urges investors to taper their expectations for a repeat of the outstanding performance seen in Q3 – 2023, in 2024.
"The days of the sector being a darling are long gone, and investors need to adapt to the new normal and reset their expectations accordingly," warns Robins.
Robins says that for the sector to enhance its attractiveness to investors it needs to regain its pricing power, and to do that, economic growth, job creation, supportive central bank action and a significant reduction in vacancies are essential.
Despite the cautious stance, Robins acknowledges the sector's importance in balanced investment portfolios and further points out that currently the sector presents investors with some attractive prospects. These include discounted valuations (trading substantially below net asset value) and significant earnings opportunities offshore. The local retail sector, which makes up more than 60% of the sector by market capitalisation, also remains relatively healthy thereby contributing to the sector's overall resilience.
The revenue earnings composition of the local listed property sector has evolved over time, resulting in a gradual reduction in its dependence on the local economy to drive growth earnings. Currently, around 43% of the revenue within the sector is now generated outside South Africa. It is therefore important for investors to recognise that the sector's outlook is not solely shaped by the local economy but is also nearly equally impacted by the global economy as well.
“Consequently, the sector's added appeal lies in its ability to offer some defensive qualities, particularly in distressed markets, because it offers investors stability during tough market conditions,” says Robins.
While the extraordinary growth witnessed in the last quarter of 2023 is unlikely to be replicated anytime soon, Robins maintains that the listed property sector remains a crucial component of a balanced portfolio, providing investors with optimal diversification opportunity as well as defensive qualities during periods of economic uncertainty and market distress.
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