Source: Company data, Catalyst Fund Managers
Data is as at 31 December 2020

Source: Company data, Catalyst Fund Managers
Data is as at 31 December 2020

As we evaluate the year’s performance relative to global property markets, it is important to be cognizant of the sectoral exposure available locally. The sector outperformers globally were the niche specialist property sectors which include data centres, lab space, towers, storage and single-family homes. The local listed space has very little exposure to these sectors with Stor-age being the only specialist storage operator. Industrial represents 18% of the local property sector and was an outperformer globally; however, the composition of the local exposure is different. Only Equites is a specialist industrial landlord with the rest of the exposure coming through diversified companies including Growthpoint, Redefine and Fortress. Globally, the traditional sectors of retail, office and hotels were the underperformers which mirrors our local performance as they collectively represent the majority of the available exposure.

Source: Bloomberg & Catalyst Fund Managers
Data is as at 31 December 2020
Global Property Index = FTSE EPRA/NAREIT Developed Rental Net Total Return Index

The niche sectors highlighted previously have their own unique economic drivers and benefits in different economic cycles. We would welcome exposure locally to these sectors as they would provide additional diversification to investors. Unfortunately, the challenge has been to source institutional quality assets locally that would build sufficient economies of scale in these niche sectors. Due to the limited availability of these assets, the traditional sectors (office, retail and industrial) will likely remain the dominant sectors over the short to medium term.

In our previous report, we documented the proliferation of international exposure within the local listed property market as offshore companies came to list on the JSE and local companies expanded their asset base into international jurisdictions.

Below we breakdown the local/offshore split by domicile (country of registration) and on a see-through basis. By domicile Growthpoint would be recognised as a 100% South African company however in reality Growthpoint has exposure to Australia, Romania, Poland and the United Kingdom which is captured on a see-through basis. By domicile offshore exposure is approximately a third however on a see-through basis the sector is more evenly split between local and offshore exposure.

Source: Company data, Catalyst Fund Managers
Data is as at 31 December 2020

Next, we breakdown the see-through exposure by its regional exposure. After South Africa, the 2nd largest exposure is to Central and Eastern Europe. This exposure began with the creation of New Europe Property (NEPI) in 2007 and today NEPI Rockcastle (after the merger with Rockcastle in 2017) is the largest listed property company on the JSE. Recognising the opportunity in CEE, many other companies have expanded into the region through listed investments (Growthpoint through Globalworth, Redefine through EPP) and with direct investments (Hyprop, Accelerate, etc.). The remaining offshore exposure is largely through developed markets including Australia, the UK and Continental Europe.

Source: Company data, Catalyst Fund Managers
Data is as at 31 December 2020

Source: Company data, Catalyst Fund Managers
Data is as at 31 December 2020

As balance sheet risks have increased, the majority of the sector has shifted their short-term strategy to focus on lowering gearing levels through asset disposals and portfolio rationalisation. In an environment of limited transactional activity and low liquidity, assets which would not have ordinarily been sold are now being considered for disposal. This will likely result in shifts in the underlying geographic exposure as companies embark on their disposal programs. We have already witnessed evidence of this change with Redefine (sold remaining Australian investments and its UK investment RDI), Attacq (sold portion of its MSP stake) and Investec Property Fund (sold a portion of its European logistics platform).

Domestic fundamentals remain weak due to an oversupply in most subsectors, slow economic recovery forecasted, increased vacancies and negative reversions on renewals will likely persist in the short to medium term. Top line pressures coupled with above inflation expense growth will continue to put pressure on like-for-like net operating income growth. Despite the weak fundamentals, we have also witnessed signs of improvements during the year with retail trade gradually recovering, future office supply which contracted to historical lows and industrial demand which has increased due to the structural change in the retail landscape. The SARB has also cut the repo rate to the lowest levels since 1998. This will benefit REITs as debt is renewed at lower rates.

The advent of the second wave, reintroduction of partial lockdown restrictions and uncertainty on the pace of the vaccine rollout is likely to weigh on short term expectations. Our forecasted forward funds available for distribution (FAD) is 10.86%. We expect moderate growth off this low base taking lower GDP and lower short-term inflation forecasts into account, which has translated into lower market rental growth across most sub-sectors. Notwithstanding the rebound in the last quarter of 2020, our 5-year annualised total return forecast for the sector remains attractive and ranges between 14% and 17%.