Ian Anderson, the CIO at Bridge Fund Managers and portfolio manager of the Nedgroup Investments Property Fund, provides an overview of the Fund’s performance as well as some insights into the future of the real estate sector post COVID-19.
The last six months have been particularly volatile. The Nedgroup Investments Property Fund was up just over 19% over the last three months, outperforming the ASISA category index but falling just shy of the SAPY index at 20.4%. More important is the performance year to date, where we are down 31.8%, which is substantially better than the ASISA average of -35.2% and the SAPY index of -37.6%. This is largely due to the positioning of the Fund and the different retail exposure we have.
The positive contributors in Q2 were Tower, Accelerate, Fairvest, Spear and Grit, contributing just under 12% of the portfolio’s overall performance. Only three companies generated negative returns, namely Octodec, Arrowhead and Indluplace. In terms of the SA REITS, most companies generated returns of around 20% and 30% in Q2.
The fund is well positioned particularly given the headwinds that favour certain property types, such as office and retail. Within retail we have high exposure to mass market retail in rural and informal areas, as opposed to large shopping centres in urban areas where a lot of the pain is being felt. Most of the mass market retailers were able to trade early on during lockdown, enabling landlords to collect the bulk of their rent from earlier on, resulting in collection rates of more than 90%. We have very low exposure to offshore, specifically Eastern Europe, and the use of cross currency interest rate swaps (CCIRS). We have increased our cash position to about 7% of the portfolio to take advantage of the extreme volatility in the market and opportunities that may arise. As an example, we are looking to increase our exposure to warehousing if possible. We have a large position in Grit, primarily due to the recent corporate action where the share price rallied. We are looking to reduce this exposure once the listing is transferred to the LSE.
The Fund’s Q2 distribution was substantially lower than the corresponding period a year ago as companies chose to defer the payment of interim dividends.
As alluded to earlier, the Fund has a substantially larger allocation to retail centres with less than 25 000 m2 gross lettable area (GLA), i.e. neighbourhood and convenience centres. Most of these returned to full cash flow generation during lockdown whereas the 50 000+ m2 centres, where we have far less allocation, are still battling to collect between 60% and 70% of rentals. The SAPY Index is dominated by these much larger shopping centres, which could be the reason why there is concern from market participants about the future for real estate in South Africa, if you only owned this index.
It’s still far too early to gauge the full extent of the pandemic on long-term property fundamentals. The hospitality, retail and office sectors are under pressure, while warehousing and self-storage have remained resilient. Stor-Age, which is about 8% of the portfolio, has just paid a full dividend and grew it by 5%, indicating that there are still businesses out there that are capable of growing their distributions and paying dividends. Rent collection rates have, on average, been improving and have moved back above 80% in June from levels of 60%-70% in April.
The Property Industry Group has requested the relaxation of REIT requirements from the JSE, i.e. a minimum 75% payout ratio, as well as tax relief from National Treasury. We believe they will not be successful. The JSE has, however, allowed REITS to delay the payment of dividends to within six months of their last reporting period as opposed to four months and pay out 75% of dividends. Final dividend payout ratios from SA Corporate and Vukile are expected to be lower, which will have an impact on distributions. It’s difficult to therefore forecast short-term distributions, but we expect to achieve between 60%-70% of January forecasts of 7.5c – 8.5c, i.e. yields of 14%-16%.
We believe that distributable earnings from these companies will return to more normalised levels in 2021, but with lower payout ratios to enable them to restore their balance sheets. It will be difficult for them to raise equity and debt, but the only way to raise capital to cover operating expenditure will be to retain a portion of the dividend. We do expect the distribution to grow to 9.5c – 10.5c in 2021 with a dividend yield of 17%-19%. When you compare this to yields on cash, money market instruments or bonds, the property sector still offers substantially higher yields.
Looking forward, we think the sector offers very attractive initial yields. Despite some volatility, the trends we saw in Q2 and continuing into Q3 are likely to continue for the remainder of the year.