Opportunity and Cautious Managed Funds update

Mar 20, 2020

2 minutes

Local fundamentals wane, but valuation is more attractive than ever

The South African listed property sector continues to recover from a series of headwinds which has impacted the sector over the past two years, including deteriorating fundamentals, governance and reporting-related concerns. Rebasing of distributions along with the introduction of pay-out ratios has also reduced expected income. Prior to the most recent global events, we believed that these factors, while unlikely to be resolved in the short term, appeared to be largely captured in valuations. Furthermore, valuations had also reflected a more sustainable earnings profile.

Clearly, the more recent sell-off due to the spread, impact, and uncertainty of the Coronavirus has made already attractively priced real estate counters even cheaper. While the effects on the various sectors are hard to ascertain, they are unlikely to be structural and infinite in nature. That said, given the nature of the virus, it is fair to expect that retailers and retail landlords could be the most impacted in the short term as countries implement lockdown measures to contain the spread of the virus.

While central banks around the world attempt to provide markets with a safety net via various monetary and fiscal stimulus packages, the benefits of these are unlikely to be appreciated until the true effect and extent of the virus is understood. The remaining concern would be any second-order effects, specifically in the debt/credit markets, which could dry up liquidity and negatively impact highly geared companies.

Locally, the South African government finally produced a budget that could be viewed as a step in the right direction, while the South African Reserve Bank took its first steps in a possible rate-cutting cycle. Both of these developments would have provided a good underpin to the South African listed property space. However, it is clear that local macro conditions will largely be overlooked in the short term and the market will take its cue from global events.

The sector has lost around a quarter of its value year to date, and local listed counters trade on average at a +15% dividend yield and a 40% discount to their book value. These are clearly attractive valuation metrics and should provide a highly attractive medium-term return profile. However, short-term volatility and downside risk is expected to remain high while the world continues to digest the impact of Covid-19.

How are we positioning your portfolios and where to from here?

Due to the tough economic backdrop and deteriorating fundamentals in South Africa recently, we continue to favour more offshore-focused property counters which provide a level of resilience in the face of global economic shocks. These counters exhibit sustainable income streams, relatively strong growth profiles, attractive valuations (more downside protection) and most importantly, in this market, secure balance sheets that are able to withstand the impending slowdown in markets around the globe.

While there is no doubt that landlords will feel the impact of the global slowdown, property is resilient in the way it earns its income via contractually based leases that are largely backed by national and multi-national corporations. This should provide decent cash generation and support for most property companies but will unlikely protect those already vulnerable from a cash flow and balance sheet standpoint. Thus, we believe there is little need to change our current philosophy and approach to investing, which is based on sustainable income and growth at reasonable valuations.

While markets and economic conditions are dynamically changing on a daily basis, we continue to actively assess our portfolios’ risks, while actively screening for opportunities that market dynamics such as these are likely to provide. Ultimately, we aim to provide our clients’ portfolios with the best risk-adjusted medium- and long-term outcomes.


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