Africa's largest fund manager, the Public Investment Corporation (PIC), has shown the greatest appetite among institutional investors in the resurgent retail property market, with most asset managers circling the sector on renewed optimism.
This is despite negative retail investor inflows in the domestic real estate market, according to data from the Association for Savings and Investment SA (Asisa), compiled by independent property analyst Keillen Ndlovu.
The sector had seen institutional inflows, mainly from the PIC, however some general investors and balanced funds were starting to look at the sector again, Ndlovu said.
“As of June, retail investor flows were negative for the year. It is taking time for the investors to return to the sector after they lost confidence over the years. I would suspect some retail investor outflows could have been due to profit taking. But that could have been premature as the sector rallied further in the third quarter, boosted by interest rate cut expectations and subsequently an interest rate cut by the SA Reserve Bank,” Ndlovu said.
Evan Robins, manager of the Old Mutual Quoted Property Fund, echoed the sentiment. He said the property market had been weaker than other asset classes over the past decade, but the rally over the past 12 months was mainly due to the market’s recognition of improved sector and macro fundamentals.
This had led to a “scramble” among asset managers for listed property, Robins said.
The sector was not completely out of the woods yet, but had endured several challenges and negative sentiment, Ndlovu said.
“The initial decline in share prices happened at the beginning of 2018. This was driven by several allegations, including market manipulation, within the former Resilient Reit stable funds. These proved unfounded, and the Financial Sector Conduct Authority cleared Resilient Reit of any wrongdoing. This was followed by weak economic growth and excess office space,” he said.
The arrival of Covid-19 further threw a spanner in the works and weakened the sector, forcing property companies to offer rental relief which affected rental growth and earnings. Just as the industry started to recover, social unrest in KwaZulu-Natal and Gauteng led to looting at retail centres and warehouses. Amid the recovery the Reserve Bank raised interest rates by 475 basis points.
The rally in the listed property prices that were up to almost 50% was pushed by factors such as the US Federal Reserve signalling rate cuts, institutional buying mainly from the PIC, SA’s government of national unity and September rate cuts.
— Property analyst Keillen Ndlovu
However, there is light at the end of the tunnel as the listed property index has increased by more than 26% since the start of the year, adding billions in value as confidence returns to the sector.
Ndlovu said the rally in the listed property prices that were up to almost 50% was pushed by factors such as the US Federal Reserve signalling rate cuts, institutional buying mainly from the PIC, SA’s government of national unity and September rate cuts. In addition, the sector had been outperforming and was by far the best-performing asset class year to date.
“The sector is not as cheap any more at these levels after the recent approximate 50% increase in the share price over the past 12 months. It’s now trading at fair value,” Ndlovu said.
“We are unlikely to see the same level of returns (50% over a year) over the short to medium term (as the listed property sector came off a very low base). The sector is likely to deliver normalised returns but, most importantly, growing income, which is what most retail and income-seeking investors prefer.”
Other positive indicators included the declining bond yields and interest rate cuts, the two-pot retirement system boosting spending and more than 200 days of no load-shedding.
There were also signs of improvement in the equity raised so far, which was about R12bn.
Ndlovu said: “Vukile and Lighthouse bookbuilds were oversubscribed. Sirius and Nepi managed to raise huge amounts. There has been a significant improvement overall this year. With the share prices increasing, it is easier for Reits and property companies to raise equity as the discount to net asset values is no longer huge and some stocks are trading at premiums to net asset value or around net asset value.”
Another trend was the growing number of Reits and property companies offering scrip dividends and dividend reinvestment options, which had been uncommon over the past three to four years. The sector could anticipate seeing this trend expand, Ndlovu said.
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