Rand weakness dampens SA Property

Until the ministerial merry-go-round in SA’s government, South African listed property outperformed equities and bonds, mustering a 15% return in rand terms for the first 11 months of 2015, reports Ortneil Kutama, Africa Property News.com Media Director.

Listed property in many developing countries has had difficult year. Currency weakness weakened its returns. Nevertheless some African property funds have held up well and many listed property companies in South Africa outperformed equities and cash.

"In SA, by the middle of December the South African rand had lost close to 30% of its value against the dollar. This weakened that country's listed property sector’s overall return severely," reports Ortneil Kutama, Africa Property News.com Media Director.

Until the ministerial merry-go-round in SA’s government, South African listed property outperformed equities and bonds, mustering a 15% return in rand terms for the first 11 months of 2015. But then the rand plummeted against the dollar. 

This is set to scupper listed property’s returns in December. By December 15, listed property had achieved a return of minus 2.42% while the JSE had lost 2.91% since January 1 2015. 

The rand took a severe tumble when South African president Jacob Zuma fired Minister of Finance, Nhlanhla Nene. 

He was replaced by David van Rooyen, an unknown in financial roles, who was then replaced by former minister of finance, Pravin Gordhan less than a week.

Bringing Gordhan back did reverse some of the rand collapse but ratings agencies remain wary about SA as an investment destination. Gross Domestic Product growth is expected to be bad for 2015 and weak again next year. 

At least one of the three leading ratings agencies, Fitch Ratings, was not convinced that replacing little-known Desmond van Rooyen with more experienced Pravin Gordhan as finance minister will change the country’s future. 

Fitch downgraded SA to BBB-this month — its lowest investment-grade rating — but changed its outlook to stable from negative .

Economic forces then remain a threat to listed property next year. 

After several years of double-digit total returns, commentators are forecasting that listed property will struggle next year. It is expected to muster only single digit returns, slightly above prevailing inflation rates. 

The fear of an interest rate hike in the US led to a selloff in bonds. This resulted in bond yields rising globally. The performance of listed property tends to follow that of bonds as both are income-generating investments. 

The Fed then on December 16 raised interest rates for the first time in nine years. The US economy is set to boom and there was space to raise the rates.

It appears South African investors are better suited then to buying into property funds with offshore exposure to large developed markets such as the US, UK, Australia and Germany. 

Investors are also encouraged to invest in specific stocks instead of the FTSE-JSE South African Listed Property Index. 

The Sapy achieved a 26.6% return in 2014 including dividends, outpacing the JSE all-share index, which only returned 10.9%. But this gap is shrinking and it is not a given that listed property will beat other equities next year. 

"We are forecasting single-digit total returns of 6% to 8% in 2016. That is our base-case scenario," head of listed property funds at Stanlib, Keillen Ndlovu, says. 

Top Performing Companies 

Among the top performers this year have been companies within the Resilient stable of companies. Other star performers have included Sirius Real Estate which only listed last year on the JSE but now has a market capitalisation of more than R6bn. 

Sirius achieved 44.07% share price growth by the middle of December. Analysts say that it is likely to still offer upside for South Africans. Sirius owns and operates business parks and storage units. Its tenants tend to be small and medium businesses. 

Fortress Income Fund was a top performer this year too. It has been helped by the company taking over Capital Property Fund. Fortess has A and B units. Its B unit achieved 135% growth for the first eleven months of 2015. 

Fortress will become one of the JSE’s biggest South African-based property fund by market capitalisation, worth around R50bn. 

The new fund will be a more liquid offering to South African investors. 

Fortress focuses on retail centre assets situated near transport nodes such as taxi ranks, bus and railway terminals. This market has become saturated in recent months and Fortress has been looking to diversify its business said Fortress CEO Mark Stevens. 

By buying Capital, it acquires the largest proportion of listed industrial property in SA. It has also been included in global property indices because of its size which will attract more foreign investment.

The new merged Fortress and Capital is set to become an attractive investment for offshore institutions especially because it will be included in the MSCI emerging markets index. 

MSCI is a US-based provider of equity, fixed income and hedge fund stock market indices, and it has fast-tracked Fortress’s inclusion in its emerging markets index. 

This will force global index trackers to buy Fortress shares, which could lead to a rerating for the company and also boost its share price. 

Cape based Freedom Property Fund had a dire year, losing more than 60 % of its value and its CEO too in the form of Tyrone Govender. Not all recently listed property funds had a successful 2015. It will be harder next year when capital is more difficult to come by. However expect more listings in 2016, many of which will be offshore based property funds. Kenya’s Nairobi Stock Exchange has launched Real Estate Investment Trusts in the country. 

Some South African funds may list on the exchange. Mara Delta, the pan African property fund could also list in Kenya. 

Investors in SA listed property need to be more careful when investing in 2016 and selective if they buy South Africa or offshore property stocks. Much of the easy money has been made, concludes Kutama.