Source: Bloomberg, Catalyst Fund Managers 30 June 2021
The sector’s discount to NAV at the end of the June 2021 was -20.5%, which continues to be below the historical 5-year discount to NAV of c. 10%.
Source: Anchor Stockbrokers; Company results 30 June 2021
Direct property valuations have come under pressure over the past 12-18months. On a market capitalisation weighted basis, average property valuations experienced a cumulative decline of c. 7% since January 2020. NAV growth is expected to be subdued at best due to potential capitalisation rate expansion and the possibility of further downward revisions to market rental growth assumptions.
Capitalisation Rates:
Rode’s second quarter 2021 capitalisation rate survey show that capitalisation rates of directly held office and retail properties stabilised at higher levels, while industrial property capitalisation rates continue to improve. The industrial market is better positioned and should continue to benefit from low vacancies and demand supply imbalances.
The same cannot be said about the office sector, which remains the riskiest property type, as demonstrated by its high capitalisation rates. This reflects the severe oversupply of office spaces and concerns over the long-term impact of the work‐from‐home trend.
Regional shopping centres capitalisation rates remained close to 9% in the second quarter of 2021 with smaller community and neighbourhood centres averaging 9.8% and 10.1% respectively, both unchanged compared to the first quarter of 2021.
Over the long term, we see risks of capitalisation rates moving out due to structural risks facing certain retail categories and offices.
Market rental growth:
Valuers have historically factored in rental growth of between 5-6% in valuations. According to MSCI data, this has been revised lower due to the negative impact of Covid-19 on what was an already weak property market.
Market property expenditure growth: Property expenditure growth has remained stubbornly high over the last few years with growth rates in excess of headline inflation. SAPOA research indicates that property expenditure is assumed to grow at c. 7% per annum over the medium term due to the high likelihood that administered costs will continue to grow above inflation.
Escalations and Reversions:
Reported escalations on new leases continue to trend lower tracking inflation in the short term and are likely to persist in the short to medium term. Due to the oversupply in most subsectors, high vacancies, and lower market rental growth forecasts, we see negative reversions persisting over time and impacting on like-for-like net operating income growth.
Source:iNET BFA, Catalyst Fund Managers, 30 June 2021
As at 30 June 2021, the historical funds available for distribution (FAD) yield for the SAPY was c. 8%. The postponement of dividend payments, implementation of pay-out ratios and the substantial decline in earnings has affected the historical FAD yield for the sector.
Source: Catalyst Fund Managers 30 June 2021
For the 2020 calendar year, we estimate that FAD declined by 27% driven by the impact of Covid-19 on operations (rental concessions, increase in expected credit losses and higher vacancies), as well as negative reversions on renewals due to an oversupply across most subsectors. For the current year, we continue to forecast negative FAD growth impacted by higher vacancies, the continuation of rental discount provisions (albeit at a lower level than 2020) and negative reversions on renewals. The third wave and corresponding return to lockdown restrictions has increased short term earnings uncertainty. Future restrictions and its duration remain a heightened risks for the sector. The impact of ongoing unrest, of which the short term and long-term impact are yet to be full quantified, could further add pressure to the sector.
