Friday, January 21

Review of the listed real estate sector for 2021


FIFI PETERS: South Africa’s listed property index has risen more than 16% since the beginning of the year, which is not far behind what JSE All-Share has done in terms of performance; that’s 20% more so far this year.

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For a review of the real estate industry and what to expect in 2022, which is only a couple of weeks away, I am joined by Garreth Elston, the CIO of Reitway Global. Garreth, thank you very much for your time. Not bad at all in terms of the rally we’ve seen in the JSE-traded property index, which has essentially recovered from its pandemic lows. What were, in your opinion, the main factors that drove the earnings?

GARRETH ELSTON: Hello. Good evening and thanks for having me. Yes, there has definitely been a good rally this year but, if we go back to the beginning of last year, the sector is still not back where it was. We have seen that some parts of the companies within the sectors have regained ground, but it has still been a bit of a long job.

It has definitely been, I think, the opening, the return to normalcy that we are beginning to see. Obviously, fewer crashes this year have helped a lot. We don’t have the massive lockdowns that we had last year that really impacted the sector in an extremely negative way. So I think at least finally this year there is a slightly better understanding that you can’t block your way to a Covid zero, and you certainly can’t block your way to having a working economy.

FIFI PETERS: In fact, it has been slow work for the industry, especially if you put it back five years. The list of properties index is down 50%, so there is still a lot of recovery ahead. But leave us a little breakdown of the performance of the respective sectors this year in terms of the office, industrial, retail and residential portfolios. Which segment of the real estate sector performed the best?

GARRETH ELSTON: We have seen a very strong rally, especially in the retail sector, which has been good to see. It really hasn’t been too surprising; it was just the way they were hit very negatively. We have had much slower movements, for example, on the storage side; we continue to have in a global sense, as well as strong movements on the industrial and logistical side. We have been very strong with the drivers there.

But with most companies in South Africa it must be remembered that most of our constituencies are diversified. They consist of both retail and office. Something like a Growthpoint point has medical care, it has logistics, it has giant shopping centers, [and] smaller shopping malls. So most of our sector is really diversified and there are not many very specialized players within it. Very often the problem you have is that if you want pure exposure, we certainly have more companies now than we used to, but it is still very difficult to get pure exposure compared to what you can get in an international market, because example.

FIFI PETERS: They are diversified in terms of segments and also in terms of geographies, which brings me to my next question about the performance of companies that have their wings spread beyond South Africa or the rest of the continent to the rest of the world. and those that have been focused purely at home or on the mainland. Which ones have done it better?

GARRETH ELSTON: Well, definitely in the last two years they would be those that have had some exposure offshore. You can see companies like Growthpoint Australia and Irongate, which is the former Investec Australia. Sirius, who is on the double list here, which is primarily focused on Germany, has done very well. Lighthouse, which started having some new deals in France this year in the retail sector, has started to recover quite well.

But if you look at the pure performers, we’ve had some really good bounces, for example on Dipula with a JV potential with Resilient; They have really recovered very well, north of a 100% return on the year. It was quite good to see you. But I think it’s really driven by, especially on the corporate action side, a lot of moves just because prices were literally so beaten earlier in the year. So they see good recoveries there, good recoveries for companies like Rebosis that have been defeated and are now starting to see a way forward, which has been missing for many years until, I think, the middle of this year. That has definitely helped.

FIFI PETERS: You were talking about the recovery that has been seen in the retail segment of the real estate sector, essentially the shopping centers. But what we also saw was that many of these companies took the position of keeping their tenants, even if it meant keeping them with lower rent increases than would have been the case had it not been for Covid. They had a hard time supporting their tenants, but it would have cost them more to find new tenants.

I’m just trying to understand: for real estate, what are some lingering effects that are still lingering as a result of the pandemic?

GARRETH ELSTON: Especially on the office side, it will be a very long process for those emerging from the impacts of the pandemic. We have not only seen a possible work from home in progress, a process that is likely to continue. You have seen many companies go bankrupt during the pandemic. Obviously, they don’t need that space in the future. There is still plenty of office space available. If you are driving around Sandton it is very difficult to do 200 meters without a ‘Stop’ sign.

So the office is definitely the sector, also in a global sense, which will be the most opaque, the least clear and the most under pressure probably for the next two years, as hopefully we begin to eventually emerge from a reality of Covid. But there are still many unknowns within the office, and especially at the local level, it will probably be one of the worst sectors you would like to have exposure to right now.

FIFI PETERS: Especially with Omicron. I see a large number of global companies, even local companies, that had plans to go back to the office, redialing those plans and saying, “Keep working from home.”

However, Garreth, at the end of the conversation, what would be your top three options in the industry and why?

GARRETH ELSTON: Oh, you know, it’s always hard to choose for next year, but I’d probably say it would be more appropriate to have locally listed companies where there is offshore exposure. If we still had to choose at this point, we would probably play the reopening and …… 6:57 plays in Eastern Europe. So companies like Nepi, Mas, we still believe that Sirius will continue to do well. Irongate looks really pretty [good] and …… 7:12, for example, which reported an update today, still works great. So we still believe that South Africa is going to be a difficult place for next year. Although prices have improved, underlying conditions on the ground will remain difficult.

FIFI PETERS: What stocks would not appear in your portfolio and why?

GARRETH ELSTON: Anyone with a large exposure to the office, a large exposure to the larger retail sector, for example. If you are looking for more convenience retail, that will remain an office within big retail, which will remain under pressure as we move through all of the Covid shocks, which will likely still be with us for the most part. Next year. This is really not where we would like to have too much exposure.

FIFI PETERS: One of the impacts of Covid that we have also seen is that real estate companies make the decision to withhold their distributions or dividends, only to weather the storm a little better. Some of them have started paying dividends and distributions again, but I think there are one, two or three that have not. To what extent do you think that could pose a bit of risk and challenge for real estate in 2022 as well?

GARRETH ELSTON: Look, I think we’ve seen a decent recovery. The companies have two years, if they pass the solvency and liquidity requirements, to pay the distributions. So they get a pass and it makes sense if you look at it last year. With the stress and uncertainty they had, it really made sense for them to hold onto those distributions, just as a matter of financial prudence.

But obviously for any investor looking for and dependent on it, it’s not great. But I think we have started to see much more positive movements in this regard. So we have seen that the bulk of companies that were under pressure and have exceeded solvency and liquidity requirements have paid again. So we think those pressures should definitely subside next year, and we really won’t have many of the same situations that we had before that, where companies were running through solvency and liquidity, and still clinging to distribution. So this year has definitely been a return to a slightly more normal situation, thankfully.

FIFI PETERS: Alright Garreth, thank you very much for that review. We will leave it there. Garreth Elston is the CIO of Reitway Global.


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