South Africa’s listed real estate sector has had a tumultuous 24 months, rising from the worst performing sector in 2020 to one of the best performing sectors in 2021.
Credit can be given back to management teams that have weathered a tough time by focusing on supporting tenants and strengthening the balance sheet. Additional credit can be given to creditors who have remained pragmatic and supported owners during the crisis. The sector is now out of its deepest lows as recoveries have recovered to over 100% in some cases and covenant breach fears have since eased.
While these short-term fears have dissipated, some of the longer-term negative structural impacts of the pandemic remain. The diverging impact of the pandemic has created “winners and losers” in different sectors. The retail sector is unfortunately one of the losers amid the rapid growth of e-commerce, and the office sector is negatively impacted by the work-from-home trend. On the other hand, logistics and distribution warehousing space has emerged as a relative winner from the pandemic as it has benefited from the rapid growth of e-commerce as well as supply chain optimization. .
Although the outlook for the South African property sector remains bleak given the structural headwinds and weak economic outlook, it is important to keep in mind the gaps between the portfolios on offer in the listed property sector. On a transparent basis, around 50% of the listed South African sector is based in offshore properties. This phenomenon favors geographical diversification and makes it possible to escape weak fundamentals locally. It is likely that the operational performance of a real estate portfolio like Sirius, owner of business parks in Germany, and Nepi Rockcastle, owner of shopping centers in the Central and Eastern European region, will be very different from a real estate portfolio mainly exposed to South Africa.
The disparity in fundamentals within the listed real estate sector gives us the opportunity to select portfolios exposed to quality properties in relevant sectors with strong fundamentals, low balance sheet leverage and management teams with good background and specialized advantages. This combination of factors, we believe, will result in stable and defensive revenue streams going forward. Companies have also chosen to employ payout ratios of between 75% and 95%, which are not foregone revenue, but will help further strengthen the balance sheet and maintain current portfolios. This will improve the overall sustainability of long-term dividend payments
Although real estate has benefited from the rebound in trade this year, we are aware of the challenges of the local environment and the structural changes in the sector. As quality-focused managers, we don’t know benchmarks and only the best companies are included in our portfolios. We believe that selecting relevant portfolios that should be able to reasonably overcome any other obstacles remains a prudent strategy. Based on our screening process, the portfolio’s average loan-to-value ratio is 31%, compared to the FTSE/JSE SA (SAPY) listed property index at 37%. The past year has been a true testament to the direct correlation between balance sheet strength and dividend payouts. The Marriott Property Income Fund currently offers an income yield of 7% and expected income growth of 3%.
Kirstin Govindasamy is an investment professional at Marriott.