Source: Bloomberg, Catalyst Fund Managers 31 December 2021

The sector’s discount to NAV at the end of the December 2021 was 16%, which continues to be below the historical 5-year discount to NAV of c. 14%.

Direct property valuations have come under pressure over the past 12-18months. Average property valuations experienced a cumulative decline of c. 10% since the onset of the pandemic (Absa research). 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 fourth quarter 2021 capitalisation rate survey show that capitalisation rates of directly held office and retail properties remain unchanged from the third quarter, while industrial property capitalisation rates continue to move lower. The industrial market is better positioned and should continue to benefit from low vacancies and demand supply imbalances.

The high capitalisation rate for grade-A decentralized multi-tenanted buildings of 10.9% provides an indication of the riskiness of the particular property type due to weak property fundamentals.

Regional shopping centres capitalisation rates remained at 9.1% in the fourth quarter of 2021 with smaller community and neighbourhood centres averaging 10% and 10.3% respectively, both unchanged compared to the third 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.