The global economy continues its recovery path despite being hobbled by the pandemic which has affected critical supply chains. Domestically, growth expectations were upgraded for 2021 by the MPC but it was cautioned that the bulk of the recovery has already taken place with downward growth revisions to 2022 and 2023. As the world continues to grapple with the pandemic, we have seen varying responses with strict lockdowns imposed in some European countries and certain cities in China while SA has relaxed restrictions over the last few weeks. Early indications are that nationally we appear to have surpassed the peak of the 4th wave while other countries including the US are recording the highest number of cases since the pandemic began.
We believe the South African listed property sector will benefit considerably from its global diversification, which, arguably, reduces its reliance on the domestic economy’s pedestrian growth. According to our analysis, 54% of the South African listed property sector’s geographic see-through exposure is from CEE, Western Europe, United Kingdom (UK) and Australia.
The sector’s forward FAD yield of 8.3% remains attractive with double digit growth in distributions forecasted in the short term due to the low base effect of covid in the historical numbers. It is important to bear in mind that our FAD yield is after allowing for additional capex provisions in our forecasts (circa 10-15% of net operating income), which generally translates into a slightly lower yield relative to the actual dividend paid out by REITs. We remain cautious of the risks facing the sector in the short-term, however it was encouraging to see that lockdown restrictions were further eased over the last month. An acceleration and expansion of the vaccine program will reduce the risk of additional lockdown restrictions but requires a sufficient proportion of the population to be fully vaccinated. Short term returns will likely remain volatile, but over the long-term we do anticipate a further re-rate in the sector once we get back to a normalised trading environment and a sustainable growth rate closer to inflation. The sector continues to trade at a discount to NAV of circa 16% and we expect the SA listed property sector to deliver annualised total returns of c.9 to 12% over the long term.
