The South African property sector has started to experience tougher conditions especially weaker economic growth and uncertainty on land reform.
South Africa has officially entered a technical recession, after Stats SA announced on Tuesday that the country’s real gross domestic product had decreased by 0.7% in the second quarter of the year.
The listed property sector had its worst run in 21 years, with the FTSE/JSE SA listed property index (Sapy) losing more than 20% so far in 2018.
It continues to face myriad challenges, including weak economic growth and uncertainty about land reform, which have deterred institutional investors.
There is no doubt that there is great concern about land reform amongst ordinary South Africans and Investors, and especially property owners.
The historical background of land ownership in South Africa needs to be addressed, but it is critical to ensure that the imbalance is dealt with while the economic stability of the country continues to be reinforced. This is the view expressed by the South African Property Owners Association (SAPOA) which represents commercial and industrial property owners.
There are no signs the FTSE/JSE SA listed property index, which includes the 20 best- rated property stocks, will recover markedly in 2018, but some analysts believe the upcoming improved financial results season may help to increase interest in the sector.
“Don’t write the sector off just yet. With yields where they are at the moment, it is an incredibly attractive entry into listed property, so possibly interest will start to reignite after all the June results are in,” said Metope Investment Managers fund manager Kelly Ward.
The sector was trading at a yield of about 8.67% at the end of July, according to Catalyst Fund Managers. This was above numerous government bonds.
Delta Property Fund was trading at a yield of 16.2% and Texton Property Fund at 18.6%, suggesting these funds may be undervalued and set for share price growth.
A Catalyst report showed the Sapy and the all property index (Alpi) recorded a negative total return of 0.5% and 1.35% respectively in July.
The Sapy comprises the top 20 liquid property firms by market capitalisation. The Alpi contains all property firms listed on the bourse, which have a combined value of about R690bn. Retail investors account for about R30bn, or 4.35%, of Alpi, Evan Robins of Old Mutual Investment Group said.
During the first seven months of the year, the Sapy fell 21.76%, its worst run since 1997, when the index delivered a negative total return of 16.19%.
In 2008 the index also delivered a negative return, of 4.47%, Ward said.
Equities delivered a negative return of 1.95% so far this year, while cash and bonds returned 4.2% and 6.53% respectively.
The Sapy has now recorded six months of negative growth in 2018, with only April being an exception when it returned 7.68%. The Sapy and Alpi had a difficult start to the year, when investors began to decrease or exit their positions in the Resilient group of companies on January 11. This sell-off persisted during the first quarter and their share prices have not recovered. Critics said Resilient, Fortress, Nepi Rockcastle and Greenbay Properties were all overvalued.
They suggested that directors had participated in trades that inflated share prices.
Other property counters have also come under pressure.
“Local property fundamentals remain under pressure. Investor sentiment has been further impacted by expropriation without compensation, the sharp sell-off, although concentrated in a handful of counters which in aggregate had a meaningful weighting in the Sapy, and concerns around governance in the sector,” Craig Smith, head of research at Anchor Stockbrokers, said.