Source: Bloomberg, Catalyst Fund Managers, 2022: as at 31 December 2022
The sector’s discount to NAV at the end of the December 2022 was 29%, which continues to be below the historical 5-year discount to NAV of c. 20%.
NAV growth is expected to be subdued at best reflecting the weak economic outlook, due to potential capitalisation rate expansion (higher bond yields) and the possibility of further downward revisions to market rental growth assumptions.
Capitalisation Rates:
Rode’s fourth quarter 2022 capitalisation rate survey indicated that the capitalisation rates of retail, office and industrial assets all weakened, reflecting a riskier property market environment due to expectations of weaker global and South African economic growth in 2023 as well as higher bond yields. Nationally, capitalisation rates in prime industrial leasebacks (9.9%), grade-A multi-tenanted decentralised office buildings (11.2%) and regional shopping centres (9.1%) remain higher than pre-pandemic levels.
Over the medium term, we see potential risks of capitalisation rates moving out due to structural changes and the relatively elevated long bond yields offsetting the stabilising operating environment. Long bond yields increased sharply in 2022 but started to normalise by the end of the year.
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 across most segments due to a weakening of property fundamentals.
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 expected to grow at 7.2% 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, with the trend expected 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, 2022: as at 31 December 2022
As at 31 December 2022, the historical funds available for distribution (FAD) yield for the SAPY was c.9.3% with SA centric companies yielding 9.8% and offshore companies 8.3%.
Source: Catalyst Fund Managers, 31 December 2022
Earnings growth has been negatively impacted for the last two years due to rental discount provisions, higher vacancies, negative reversions, and lower income from offshore investments. For 2022, Nepi Rockcastle was the main contributor to the sector’s DPS growth, due to the arbitration provision reversal. The rest of the companies saw a modest rebound in earnings growth due to base effects, significantly lower rental discounts and the resumption of dividends from offshore investments.
