Ian Anderson of Bridge Fund Managers, Portfolio Manager for the Nedgroup Investments Property Fund, reflects on the impact on the sector and the short-term outlook for domestic property.
The performance of the property sector in Q1 did not paint a pretty picture. The SA Listed Property (SAPY) Index was down 48.2%, meaning that prices dropped by almost 50% with a small positive contribution from companies that declared and paid dividends in the quarter although it’s a very light quarter for dividend payments. The Nedgroup Investments Property Fund did a little better than that declining by just over 42%. We were fully invested during that period with very little cash in the portfolio. April has been a positive month for the fund and we are also outperforming the SAPY index and most of our competitors by almost 3%. Much of the portfolio’s relative weakness in the last 12 months was clawed back over the last 3 months and we’ve performed in line with the SAPY Index.
There was no positive contribution to performance in Q1. Some of the businesses that performed well, such as Equites (-0.07%) and Stor-Age (-0.79%) are obviously very relevant product types in this market. The performance of Accelerate (-6%) was a big disappointment, but it is exposed to the one product type where we see the biggest risks going forward, namely the regional (up to 75 000m2) and super-regional (80 000m2+) shopping malls. It has, however made up for a lot of that poor performance in April. The big surprise for us was the negative contribution of Fairvest (-4.67%) where we had a large weighting of 11.69% and which is exposed to the mass market retail segment. Despite this, it continues to do very well and was able to collect more than 70% of its rental income for April.
Looking at the SA REITs (real estate investment trust) Q1 performance, Safari was the best performer with Stor-Age, Equites and Fairvest, all holdings of the fund, among the top 10 performers in the sector.
Current fund positioning
The fund was relatively well positioned heading into the lockdown. For some time we’ve been concerned with the relevance versus quality of high-end fashion-dominated regional and super-regional malls with large food and beverage and entertainment components. We felt their values were significantly overstated and, as such, had low exposure to this property type, which has served us well. We also had low exposure to the highly geared Eurozone retail portfolios and specifically the use of cross-currency interest rate swaps (CCIRS). Another positive aspect of the portfolio’s positioning was the high exposure to mass-market retail in rural areas and townships where the bulk of tenants are considered either essential services or products, which can be seen in the relative performances of Safari and Fairvest. We reduced our exposure to Redefine and Vukile in March. Vukile’s share price has fallen a further 25% since we sold. Government has continued to pay rents and is one of the only tenants not looking for concessions. We have built up cash to about 2% of the portfolio so we can take advantage of the very large daily price moves we’re seeing in the bigger names which present opportunities, such as Growthpoint. Our first quarter distribution was delivered in line with expectations.
Outlook for 2020 and beyond
We know that the Covid-19 pandemic and global lockdowns have had a major impact on property markets around the world. We are seeing more and more major tenants that are not operating refusing to pay rent while not generating any revenue. On average, property companies in South Africa are only collecting between 60% and 65% of their monthly rent. This obviously depends on the type and extent of their retail exposure. The Property Industry Group has been established to request the relaxation of REIT requirements from the JSE, specifically with regard to the minimum pay-out ratio of 75%. There’s a strong likelihood that the JSE will grant them this dispensation. At the same time, they’re looking for tax relief from National Treasury, which is unlikely to happen.
Most companies that are paying interim dividends are likely to be delayed as announced by Arrowhead, Hyprop, Indluplace, Octodec and Redefine. Final dividend pay-out ratios are being lowered, but we assume that most companies will make the minimum 75% pay-out ratio while that is in force. Forecasting short-term distributions for the portfolio has been difficult, but we are still expecting to receive between 60% and 70% of our previous forecasts, which is a middle road scenario of 7.3c to 8.5c which results in a yield of between 15% and 17.5%. We think that distributions will start to return to more normalised levels in 2021, but with a period of lower pay-out ratios as companies look to strengthen their balance sheets during this period of uncertainty. The current expectation for distributions in 2021, assuming a gradual relief on lockdown, will be 11c, which is a yield of about 23% on current prices.