Source: Bloomberg & Catalyst Fund Managers
The sector’s discount to NAV at the end of the quarter was 38%, which is well below the historical 5-year discount to NAV of c. 6%.
Source: Anchor Stockbrokers
Direct property valuations have come under pressure over the last year. On a market capitalisation weighted basis, average property valuations declined c. 6% in the last reporting period. 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: According to SAPOA data, on an All-Property level, overall capitalisation rates have stayed consistent between 9.5% to 9.7% over the past 18 months. This should also be viewed in the context of limited transactional activity to gage market pricing. 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 to an all-time low of 4.5% 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. As of November 2020, 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 have started trending lower to track 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
Data is as at 31 December 2020
At the end of the year, the historical dividend yield for the SAPY was similar to the 10-year bond of c. 9%. The postponement of dividend payments, implementation of pay-out ratios and the substantial decline in earnings has affected the historical dividend yield for the sector.
Source: Anchor stockbrokers & Catalyst Fund Managers
For 2020, we estimate that funds available for distribution 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 forecast a subdued rebound as the full impact from higher vacancies filter through, the continuation of rental discount provisions (albeit at a lower level than 2020) and negative reversions on renewals. The second wave and corresponding return to lockdown restrictions has increased short term earnings uncertainty. Future restrictions and its duration remain heightened risks for the sector. Distributions and pay-out policies are currently being reviewed by most management teams and we anticipate that the implementation of a reduced pay-out ratio will become the norm.
