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Investment Focus

Investment Focus

INTEREST RISING AS CHOPPY WATERS SETTLE

Both listed property and the residential rental property sectors are set to attract more investors this year on the back of improved consumer and business confidence

The debate over whether it is better to buy property or shares has been going on for as long as anyone can remember, and is likely to continue, because the answer for each individual investor is that it very much depends on their personal perspective, risk appetite and financial circumstances.

And in South Africa these are seemingly always subject to swift and dramatic change, thanks to outside events that have major implications for real estate and the stock market. In the past year alone, investors here have had to absorb and adjust to several changes of finance minister, huge shifts in the rand exchange rate, severe investment rating downgrades, the fallout of the Steinhoff and Naspers investigations, a change of leadership in the ruling party, a new president, and negative hedge fund reports that have recently damaged the reputation and value of a major bank and one of the biggest listed real estate investment trusts (REITs). Billions of rands have been lost on the stock markets and thus from investors’ savings and retirement funds, sometimes within hours. Rising inflation and unemployment have put enormous pressure on household budgets and, as if that wasn’t enough, South African consumers have all been traumatised by the effects of the grand corruption that has been taking place at the highest levels of government and business for almost a decade. No wonder then that investors were thin on the ground in 2017, and not only because returns in both the listed property sector and the residential rental sector declined.

Although it has outperformed every other asset class over a 10-year period, listed property as per the South African Listed Property Index (SAPY) was only the second-best performer after equities last year, having achieved total returns of 17,2%, compared with 20,9% for equities. And the REITs, which make up the bulk of the index and are the way into the sector for most private investors, achieved total returns of only 13,5%, compared with 14,7% in 2016.

More recently, investor confidence in REITs has been dented by the rapid drop in the share prices of Resilient Reit and its associated companies Nepi Rockcastle, Fortress and Greenbay. The group, which accounts for about 40% of the SAPY value, was accused of artificially inflating its income and net asset value, and more than R30 billion worth of shareholder value was wiped out in the ensuing scramble to offload its shares.

However, listed property was still way ahead of bonds (10,19%), cash (7,52%) and residential real estate last year, with the FNB Property Barometer showing average house price inflation of just 3,7%. And South African REITs (SA REITs), of which there are 31 listed on the JSE, still featured strongly among the Top 100 companies that earned the most for shareholders last year (see Figure 1).

“Indeed, the sector has held up really well, despite the current negative sentiment,” says SA REIT Association chairman Izak Petersen. “It remains the best income producer, a defensive investment through cycles and a powerful shield against inflation, and should make up a meaningful percentage of any serious investor’s portfolio.”

What is more, REITs are likely to become even more attractive to certain investors in the light of current moves by the EFF and the ANC to amend Section 25 of the Constitution and enable land expropriation without compensation. There are many local investors who perceive this as the thin edge of the property nationalisation wedge, and will naturally turn to those companies that have diversified their holdings into international markets and whose assets are thus less exposed to the risk of land or property seizure by the State.

SA REITs began this process of globalisation about 10 years ago, and it has gained such momentum in the past two years that now an estimated 45% of SAPY earnings come from about 25 other countries, including Australia, Eastern and Western Europe and the UK.

On the other hand, for many private investors, equities in general have been tainted by the Steinhoff and Naspers problems that to date have cost shareholders more than R500 billion, whereas the prospects for the residential rental market are improving thanks to better-than-expected economic growth last year (1,3% instead of the 1% forecast by National Treasury), a marked improvement in consumer and business confidence since the appointment of Cyril Ramaphosa as South Africa’s new president, a stronger rand, and falling inflation and fuel prices, which will alleviate the effect of the VAT hike announced in the recent National Budget speech. Even better, figures from automated rental payment platform PayProp show that salaries increased by an average of 4% in 2017, compa red with an average decrease of 3% in 2016. (According to the most recent BankservAfrica figures, the actual average take-home pay in South Africa is now R14 000 a month.)

This will mean some improvement in affordability and demand from prospective tenants, and should also lead to a decline in rental delinquencies. Currently, according to specialist credit bureau TPN, some 5,9% of tenants nationally are defaulting on their rent each month, 10,63% are making only
partial payment and 5,32% are paying late. The percentage of tenants paying in full and on time is rising and currently stands at 67,29%.

Prospective investors do need to be aware, however, that these percentages can vary widely across regions and according to the rental value band, with the best payers being in the R7 000 to R12 000-a-month rental band, and the Western Cape having the lowest regional delinquency rate. In addition, notes Andrew Schaefer, MD of national property management company Trafalgar, affordability remains a problem overall, and especially in the CBDs and inner cities, where vacancy levels rose sharply last year and are now sitting at around 7% (see figures 2 and 3).

The main problem, says Greg Harris, CEO of Chas Everitt Property Rentals, is the heavy debt load that most South African consumers are still carrying, with approximately 72% of households’ gross income going to debt repayment and housing costs, and this means landlords cannot anticipate the annual 8% to 10% rental increases of the past. Indeed, the PayProp annual report for 2017 shows that while the weighted average national rental for the fourth quarter of 2017 was R7 308, compared with R6 930 the year before, the national average rental increase in the last quarter of
the year was just 5,75% year-on-year.

Nevertheless, rental inflation will probably continue to outpace house price inflation this year and continue the gradual increase in the average gross yield on rental property that has been taking place since the end of 2016. This will be attractive to investors who feel more comfortable with
bricks and mortar than with listed property and those who need bank loans to purchase their investments, and could well lead to a mild increase in buy-to-let purchasing later this year.

TEXT Meg Wilson PHOTOGRAPHS Supplied

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