Rich pickings for property sector

As SA's low-growth environment set to continue, opportunities abound for their portfolios.

The year 2018 will be remembered as one of the toughest years for listed property investments on the JSE, where around R120bn of market capitalisation was lost off the indexes. Some shares lost more than 60% of their values and now trade at prices well below their net asset value. 

With SA’s low-growth environment set to continue, property companies are making sure their portfolios are primed to take advantage of the growth opportunities available.

“For us it is important to get good leases with good escalation rates as a way out of this lowgrowth environment,” says Fortress CEO Mark Stevens. “We are securing lease escalations with blue chip businesses — with escalations at 7% to 8% — as a defence against the low-growth environment which we see persisting for the next 12 to 24 months.”

He says Fortress’s portfolio is moving increasingly towards logistics (big box distribution centres), which comprise over 40% of its portfolio, and retail (30%), while reducing exposure to industrial and office spaces, which make up the rest.

About 40% of its assets are offshore through its 24.3% stake in JSE and Euronext-listed NEPI Rockcastle. It is a retail-focused investor in the central European market in countries growing at 4% to 5% and good long-term investment potential, providing an alternative to the low growth in SA.

Back home the group’s retail investment is largely skewed towards about 60 rural and small town properties, which has been a strong sector over the last couple of years. Logistics remain the largest focus, and the fund has about 100 buildings, many of which it has built or is building.

Fortress has a logistics development pipeline of about 1-million m² and along with the sale of the office and industrial portfolios, these developments will enhance the quality of the portfolio and provide growth once completed.

“Locally we are not seeing too much turnaround at the moment, which is why we have chased the logistics and rural retail market where we see growth. We are also selling lower-growth industrial and offices to smaller entrepreneurial investors who can extract value.” The group’s retail properties tend to be exposed to areas where there is good farming, mining and tourism activity and significant government grant payments. This plays into retail sales in these areas, which are ahead of official retail sales numbers. Black Friday and Christmas sales will be big drivers of activity in a slowing retail market.

However, there is a long way to go before property investment regains its shine. Stevens says property is a long-term investment, and investors need to take that into account. “The last year has been very difficult, off a high base, but investors with a long-term view have still done well. Time and inflation are kind to property, and we are sitting in a lower inflationary environment while SA has come from a high to a lower growth economy.” 

He says property remains a higher yield-paying investment, and while there has recently not been the distribution growth that investors would have liked, longerterm investors have still done well and should continue to do so in the long- term. 

Fortress is expecting the economy to continue to bump along over the next year. “In the property industry we expect more consolidations and fewer listings. We think investors are going to see an SA property market that is more mature in terms of its investments and hopefully producing at least 5% growth.” 

However, the first half of 2019 could be rocky. “There are a lot of uncertainties in the market and as we get closer to the election we expect some difficult phases. The market is looking for a lot more known variables, and markets will do better once those unknowns become known. As we get past elections we expect things to settle down and return to the normal course of business,” Stevens says. 

“We expect next year to be exciting as we keep making attractive sales, the proceeds of which go to new logistics developments. We expect less but bigger buildings in the portfolio, with lease profiles extended to longer leases of better quality in high-demand areas.” 

Financial director Steven Brown says investors are increasingly focused on stable and sustainable distribution growth and on the net asset value of the Real Estate Investment Trust. “This is what international analysts and investors look at, and the SA market seemed to have forgotten those metrics until recently,” he says.