Listed property sector remains stock-picking play in 2022

The reality is that today’s property sector is about selected opportunities. The key is staying nimble and focusing on selected areas of the listed property market that can still perform, even as the broader FTSE/JSE All Property Index (ALPI) is declining.

The first half of the year has been unpleasant with unexpected shocks in the market. As the global economy was recovering from the COVID-19 pandemic, the unforeseen happened in the form of Russia’s invasion of Ukraine, leading to acute geopolitical tensions. Additionally, the financial market experienced high levels of volatility at the start of 2022, which was reflected in overall weakness across all asset classes due to risk-off investor attitude and concern regarding global inflation and interest rate policy. Added to this, COVID-19 was still causing supply chain disruptions across several Asian and European countries.

From a relative performance viewpoint, the sector continues to gradually gain ground against both the JSE All Share Index (ALSI) and All Bond Index (ALBI) over the medium and long term. The JSE All Property Index’s (ALPI) one-year forward dividend yield is 8.6%. Nevertheless, the year-to-date (YTD) performance was down 12.7% on the South African Listed Property Index (SAPI) and 13.5% on the All-Property Index (ALPI). This was due to market volatility, inflation pressures, interest rates going up, electricity and fuel supply issues, which did not bode well for the sector and resulted in an unstable outlook.

At Absa, we continue to see tighter financial conditions, the risk of a monetary policy tightening, political instability and risks that may further market volatility and therefore retain our blended portfolio management approach to express our convictions.

The current volatility offers a window of opportunity to position property portfolios to benefit from the recovery of the local and global economy when it happens in the medium to long term. There are currently some pockets of selected opportunities in retail and industrial subsectors driven by strong e-commerce and rapid changes accelerated by COVID-19.

Looking ahead

The post-pandemic economic recovery is slowing, with the risk of recession, and is further threatened by geopolitical events that also strain global inflation. In addition to this, rising interest rates that result in higher borrowing costs may put a damper on acquisition activity.

The office space will remain a concern for many years to come, as oversupply continues to be a challenge, and repurposing the office space for alternative use has not been an easy exercise.

Other key changes around the office subsector has been work-from-home (WHF) hybrid models. The easing of pandemic restrictions has supported retail mall activity. However, it is expected that the retailers and restaurants will experience marginal pressure and increased volatility in their revenues over the next few quarters as consumers cut on discretionary spending and become more price-conscious due to inflation being at an all-time high at 6.5% since 2017, according to Statistics South Africa.

There is no doubt that the sector reassured investors, funders, regulators, and other key stakeholders that it can be resilient and recover.

Most importantly, the sector also made efforts in correcting governance issues, restoring balance sheet strength, and remaining the most accessible liquid and cost-effective way to own property.

The bulk of the SA listed property companies’ balance sheets are in reasonably good shape to buffer headwinds, and, as result, sanity is returning to the investment markets.

From the above, it is noted that some REITs counters remain mispriced and offer excellent value propositions for investors, thus, making the current environment a stock-picking environment, considering the risks outlined above.

Thabo Hlangwani is manager research analyst at Absa Multi Management.