SAPOA ANNUAL CONVENTION & PROPERTY EXHIBITION - Listed Property Sector Outlook Bandile Zondo June 2019
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SAPOA ANNUAL CONVENTION &
PROPERTY EXHIBITION
Listed Property Sector Outlook
Bandile Zondo
June 2019
• SA REITS offer attractive yields but fairy priced on a 12 month view • YTD performance reflects underlying weakness • Very limited upside catalysts beyond a reform driven agenda • Growth too weak to turn the tide (need > 2% GDP growth) • Edcon managed for now but risk remains • Pricing looks closer to fair and bottoming – Confidence crisis, Policy Reform & Eskom catalysts • M&A opportunities but likely to remain muted - investors waiting until policy clarity • Sector diversification helps cushion the blow • Much of return in yield than capital – yields have priced for this but not NAVs • Governance improving – SA BPR Second Edition
YTD performance reflects underlying weakness
Total Returns to 31 May 2019
Listed property has
underperformed YTD and Date May-19 YTD 1 year 3 years* 5 years* 10 years*
over the past 3 years…
Equities -4.8% 7.1% 2.4% 4.2% 5.4% 12.6%
…triggered by the fall in RES
stable of companies, later Listed Property -0.9% 3.8% -4.8% -2.6% 5.9% 12.6%
weak domestic fundamentals Bonds 0.6% 5.3% 7.7% 10.5% 8.3% 8.8%
unsustainable income
streams & global growth Cash 0.6% 3.0% 7.3% 7.4% 7.1% 6.6%
concerns (UK Retail, Trade
war and EU growth)
Underperformance in the past 18 months… …triggered by a collapse in RES, Fortress & Nepi
RES FFB NRP
Listed property Equities Financials Banks Insurance
RES concerns being 100
addressed, mainly: 115 90
Crossholding structure 110
80
(Company), Consolidation of 105
70
BEE trust (Company) and 100
60
share price manipulation 95
(FSCA) 50
90
40
85
Sector saw a 31% de-rating 30
80
in 2018 as earnings outlook 20
revised lower 75
70 10
SA REITs Association also 65 0
updating BPR to improve
disclosure and governance
Source (for all data): I-Net Bridge, SBG Securities Research & Analysis
SA macro outlook remains weak & any recovery likely to be protracted
% avg 2018 2019 2020 2021
Household
consumption Consumer spending is constrained by weak employment and income
1.8 0.9 1.6 2.8
expenditure (HCE) growth. Middle and high income groups can afford to take on more debt.
Fiscal constraints and ongoing underspending weighs on public sector
Gross fixed capital
formation (GFCF) -1.4 -1.0 3.0 4.0 capex, while a weak and uncertain economic outlook curbs private sector
fixed investment
GDP There is still downside risk to the near-term trajectory. Medium-term
0.8 0.6 1.8 2.5
growth should pick up if policy certainty improves.
Current account Weak growth and supportive relative prices (terms of trade) constrains the
(% of GDP) -3.6 -3.2 -3.8 -4.1
CAD.
R/$ (YE) The rand should recover from undervalued levels if there are credible signs
14.35 13.80 13.80 13.50
of policy reform and no further intensification of the global trade war.
CPI Inflation should remain subdued given the SARB’s credibility and a lack of
4.6 4.7 4.7 5.0
demand-driven price pressure.
Repo rate (YE) We expect a 25bps rate cut this year; the money market now expects at
6.75 6.50 6.50 6.75
least 2 cuts.
Source (for all data): SARB, Stats SA, SBG Securities Research & Analysis
SA over-retailed – supply/demand imbalance Listed property exposures (excl. offshore)
Much of the SA REITs biased towards retail
previously seen as a defensive asset class
Office,
Trading density growth slowing to historical 24%
lows
Some 60% of store categories managed to Industrial
Retail,
generated TD growth by reducing space 59% , 14%
Also, worth noting that 60% of SA’s Economy Other,
driven by HCE - low single digit growth 3%
Trading density growth weak @ 2.5% Trading density growth 2018
Community/Neighborhood (convenience)
6.%
centres outperforming larger malls… Super Regional Regional Small Regional
Community Neighbourhood Total/Wtd Avg 5.%
4.3%
15 %
..mid tier malls continue to struggle 4.%
3.2%
10 %
3.% 2.5%
5%
2.%
1.0% 1.0%
0%
1.%
-5% 0.%
-10%
Source (for all data): SACSC, IPD, SAPOA, SBG Securities Research & Analysis
Listed sector TD growth slowed materially and retail rentals rebasing
Listed property trading density growth (%) Retail reversion (%) – listed property
6%
8.0% 4.9%
4.5%
7.0% 4%
2.6%
6.0% 2% 1.4% 1.3% 1.2% 0.4%
5.0% 0.0%
0%
-0.1%
-0.5% -0.5%
4.0%
-2%
-1.8%
2.8%
3.0%
-4% -3.3%
2.0% -4.6%
-6% -5.4%
1.0% -6.4%
-8%
0.0% L2D VKE IPF EMI RES Dipula EQU ATT FVT* FVT HYP GRT SAC RDF REB
ATT RES REB FVT* L2D VKE IPF FVT RDF GRT EMI HYP
Source (for all data): Company data, SBG Securities Research & Analysis
* Excludes 3 large tenants with long leases. Incl. these TD growth (%) was 1.9%SA over-retailed – supply/demand imbalance will remain with us Retail vacancy (%)
SC supply per unit of GDP & HCE 6%
Retail vacancies currently stand at 4.2%, 5.1% 5.0%
above the long term average of 3% 5%
4.0%
SA commands the third highest shopping 4%
3.5%
3.3%
centre exposure per unit of GDP after US and
Canada 3%
Yet pipeline for retail space remains unabated, 2%
with SACSC projecting 500k sqm over the
next 2 years 1%
0%
Most notable schemes: Super regional Regional Small Regional Community Neighbourhood
• Fourways Mall (Accelerate) – 100k Retail pipeline & number of centres
expansion Retail pipeline & avg size/centre
Numbe r of retail centres developed Ave rage size (' 000 sqm) - RH S
• Cornubia mall (Durban) 60 0 27 30
50 0 25
SA Retail yet to see the impact of changing 18 18
40 0 20
consumer habits globally
14
30 0 12 15
11
20 0 10
10 0 5
124 308 449 493 195 68
0 0
19 70's 19 80's 19 90's 20 00's 20 10 - 20 17a -
20 16 20 20e
Source (for all data): SACSC, SAPOA, SBG Securities Research & AnalysisSA over-retailed – Edcon challenges resolved for the time being
Edcon liquidation concerns largely bedded
down for the near-term as landlords and Listed Property Exposure to Edcon*
banks agree to refinancing deal
Exposure % SA only Exposure % Group
Accounts for about 1.8% of SAPY
9%
Some landlords agreed to a 41% rental cut for 8%
8%
a 24 month period (option 1)…
7%
7%
…while some opted to subscribe for equity (or
capitalize the impact) without compromising 6% 6%
rents (option 2)…
5%
5%
…to avoid setting a precedence and limit
contagion. Equally will not impact earnings 4% 4%
3%
Some REITs have taken back (or expected to 3% 3%
2% 2%
take back at least 20% of Edcon space)… 2% 2%
2%
2%
…and looking to re-let in a weak demand 1%
1%
environment 1%
7% 6% 4% 4% 3% 3% 2% 2% 2% 2% 2% 1% 1% 1%
0%
HYP L2D RES REB VKE APF AWA RDF IPF GRT ATT Fortress EMI SAC
Source (for all data): Company data (2018), SBG Securities Research & Analysis
* Based on 2018 exposures – yet to be updated for recent company resultsOffice vacancy (%) over time Office sector remains under pressure Office vacancies sitting at around 11% and have been largely flat around these levels for sometime In Q1-2019, vacancies accelerated across all grades with the exception of B-grade Prime vacancies recorded the largest quarterly deterioration by nearly 2% over Q1-2019 due to new stock in Sandton Annual rental growth remains flat (negative in real terms) & mirrored by listed sector… …although revenue from office landlords are negative due to high incentives Office vacancy (%) by grade Office vacancy (%) by region In real terms rents have declined by 10% over the past decade Co-working or flexible office space the new buzz word with WeWork entry into SA Source (for all data): SAPOA, SBG Securities Research & Analysis
Examples of incentives offered in the office market Source (for all data): Google, SBG Securities Research & Analysis
Office sector remains under Office vacancy (%) by region
pressure 400 Net Absorption GLA ('000 sqm) Vacancy rate - RHS 16%
300 14%
Despite the high vacancies, new office stock
200 12%
continues to come into the market
100 10%
Landlords using new better quality office stock as a 0 8%
defense mechanism to defend against others cherry -100 6%
picking their tenants
-200 4%
Much of the new stock over the past decade has not -300 2%
been fully absorbed in the market… -400 0%
…and office-to-resi conversions have not been
enough to anchor the vacancies
Distribution of new stock Current vacancy (%) plus spec stock (%)
Need 1.1m sqm (or 100k new jobs) to be taken up
before sector is back to full absorption
Sandton
14%
About 56% of new supply of stock concentrated in 3 Waterfall
3% 26%
nodes in JHB, namely Sandton (25%), Waterfall Rosebank
(16%) and Rosebank (14%) 3%
Menlyn area
5% Umhlanga
Sandton office vacancies could climb to 20% if Midrand
5%
speculative stock remains unlet CBD CPT
6% 16%
Bellville
Pressure mounting on Sandton historical core
7% Bdfview
(Fredman, Grayston, Wierda & Sandown)
14% Other
Source (for all data): SAPOA, SBG Securities Research & AnalysisSandton rental growth (%) by grade Sandton vacancy (%) vs absorptions
60 Net Absorption GLA ('000 sqm) Vacancy rate - RHS 18%
13%
40 16%
11%
20 14%
9%
12%
0
7% 10%
5% -20
5% 8%
-40
6%
3%
-60 4%
1%
-80 2%
-1%
-100 0%
-3%
P A B C Sandton non P-grade
-4%
Source (for all data): SAPOA, SBG Securities Research & AnalysisNew Sandton Skyline Source (for all data): Google, Companies, SBG Securities Research & Analysis
INDUSTRIAL Sector- vacancies low, stable but rental growth slowing fast In contrast to retail and office, industrial vacancies have declined from 5.2% in 2016 to 3.6% currently… …and currently appear to be stabilizing… …however, rental growth continues to slow now, which is 4.6% broadly in line with inflation Steady growth in manufacturing production – back up to 2008 levels – anchoring vacancies New logistics product also enjoying strong demand However, this is expected to reverse quickly as impact of Q1-2019 load shedding filters through Source (for all data): SAPOA, SBG Securities Research & Analysis
Overall LFL NPI growth
Reported LFL SBGe Overall Avg
Despite escalations of 6.5%-
7.5%, NPI growth under 12%
9.8%
pressures, average just over 10%
3%
8% 7.1%
6.4%
6% 5.1% 5.0%
Lower than CPI - going 4.0% 3.9% 3.8%
3.4%
backwards in real terms 4%
3.2%
2% 1.1% 1.0% 0.8%
Office weakest at c-0.8%, 5.1% 5.0%
0%
followed by industrial (+1.2%)
-2%
and retail at (+4%)
-4% -3.0% -3.1%
Impact of Edcon capitalized by
most landlords
Segmental LFL NPU growth
Also headline rentals growing
faster than cashflow income 8% FVT* IPF RES* HYP* GRT* RDF* SAC OCT* APF* REB* Avg
4.0% -0.8% 1.2%
due to high incentives being
6%
offered to let space
4%
2%
0%
-2%
-4%
Retail Office Industrial
Source (for all data): Company data, SBG Securities Research & AnalysisDeal activity has slowed materially - Confidence crisis
Equity Capital raised (Rbn) Total number of transactions
70 Office Industrial Retail
62.7
140
129
60
120
47.2 48.8
50
100
40 83 84
34.8
32.9 80 70
30 58
60
44
20 39 41 36 37
14.1 40 32 31 29 31
21
10 20
1.8
0 0
2013 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018
Source (for all data): Bloomberg, Datastream, JLL, SBG Securities Research & AnalysisNeed at least (> 2%) GDP growth just to keep vacancies flat
Demand for Commercial Property vs GDP growth (%) Company liquidations vs Business Confidence
8% Growth in demand for stock GDP growth rate (%) 1 8-mth rolling Change in Liquidations (inv.)
A vg 18-mth rolling BConfidence - RHS
7%
6% -6 90
80
5% -4
70
4%
-2 60
3% 50
0
2% 40
2 30
1%
20
0% 4
10
-1% 6 0
Dec-03
Dec-06
Dec-12
Dec-15
Dec-00
Dec-09
Dec-18
Sep-04
Jun-05
Sep-07
Jun-08
Jun-11
Sep-13
Jun-14
Sep-16
Jun-17
Jun-02
Sep-01
Mar-03
Mar-06
Sep-10
Mar-12
Mar-15
Mar-09
Mar-18
-2%
Source (for all data): Stats SA, SAPOA, I-Net Bridge, SBG Securities Research & AnalysisListed property premium to long bonds disappears, bottoming?
Listed property yield (excl. Offshore ) Bond Yields
10%
10%
9%
9%
8%
8%
7%
7%
6%
6%
5%
Source (for all data): Company data, INET Bridge, SBG Research & AnalysisListed property rating/spread reflecting fundamentals
– fairly priced but bottoming
Spread (excl. offshore) LT avg Vacancy (%) smoothed RHS
1.4 14%
1.3
Attractive 12%
1.2
10%
1.1
8%
1
6%
0.9
4%
0.8
0.7 2%
Expensive
0.6 0%
Source (for all data): Company data, INET Bridge, IPD, SBG Research & AnalysisCap rates need to shift to reflect new norm
Capitalisation rates lagging market cashflows Price-to-NAV – sector at a discount or fair?
Spread (excl. offshore) LT Avg Cap rates RHS LT Avg P/TNAV (excl. offshore) P/TNAV
1.4 11.0% 1.6
1.5
1.3 10.5%
1.4
1.2 10.0% 1.3
1.1 9.5% 1.2
1.1x
1.1
1 9.0%
1.0
0.9 8.5% 0.9x
0.9 0.9x
0.8 8.0% 0.8
0.7
0.7 7.5%
0.6
0.6 7.0%
Source (for all data): IPD, Company data, I-Net Bridge, SBG Securities Research & AnalysisMost SA REITs trading at discount to NAV but M&A activity
likely to remain muted
P/TNAV SAPY FF Weights
2.0x 25%
1.8x
1.6x 20%
1.4x
1.2x 15%
1.0x
0.8x 10%
0.6x
0.4x 5%
0.2x
0.0x 0%
Source (for all data): Company, SBG Securities Research & AnalysisLack of growth sees balance sheets come under pressure
Asset sales to de-risk dilutive to earnings and offshore gearing aggressive
Gearing levels/LTV (%) average just over 40% Offshore structures >60% geared on average
80%
140%
70%
120%
60%
100%
50%
80%
40%
60%
30%
40%
20%
20%
10%
0%
0%
Source (for all data): Company data, SBG Securities Research & AnalysisDiversification into CEE could help mitigate SA weakness
SAPY only 53% SA now , down from just
under 60% a year ago Listed Property Index Composition
SA REITs Index composition
Nearly a 3rd of exposure is now in CEE
which is seeing strong growth 1% SA
SA
UK property- retail apocalypse on
0% US
4% 2% 0%
changing consumer habits and Brexit 7% US
UK 5%
• Fast casual dining market saturated 0% 12% UK
29% OZ
• Headline rents stable but cashflows 53% Eastern EU OZ
under pressure
Western EU Eastern EU
8% 2% 74%
• Retail valuations no longer hold
Africa (ex-SA) Western EU
• NAVs discredited gold standard Other
metric Africa (ex-SA)
2% 0%
Other
Source (for all data): Company data, INET Bridge, SBG Research & AnalysisCEE GDP growth (%) & forecasts
CEE growth solid and likely to cushion SA REITs
2012-2018 2000-2018 2019E-2020E Forecast
5%
CEE exposure has increased to nearly 30% of the listed sector
GDP growth forecasts remains strong 4%
Wage growth strong and outpacing CPI – strong real sales growth expected 3%
Real Estate market transaction activity remains robust 2%
Poland now regarded as a developed Economy 1%
Risks: Politics, concerns that Polish economy overheating, Global growth 0%
slowing Romania Poland Hungary Slovakia Czechia Bulgaria CEE 6
Wage growth and inflation in the CEE CEE Real Estate transaction volumes (EUR m)
1000
800
600
400
200
0
2010 2011 2012 2013 2014 2015 2016 2017 2018
Source (for all data): Colliers International, SBG Research & AnalysisMuch of the sector’s return is driven by yields and yields are attractive
450 Capital Return Total Return
400 225% Capital
return Jan
2009
350
300
170%
income
250
return
200
150
100 54% Capital
return
50
Source (for all data): I-NET Bridge, SBG Research & AnalysisGovernance improving – SA REITS BPR Second Edition
SA REITs have a strong record & proud history of self regulation
Second edition/draft of SA REITs BPR is currently in circulation for public comment
The purpose is to enhance transparency, comparability & on par with global REIT standards:
• Standardized calculations of non-IFRS measures which will be externally audited as well
• Branded SA REIT supplemental performance measures (e.g. “SA REIT DPS” or “SA REIT NAV”)
• Some of the proposed changes include but not limited to:
a) Dividend stripping (cum-dividend impact) shown separately
b) Dividend declared by associate companies after reporting period
c) “SA REIT NAV” to closely resemble “Tangible NAV” by excluding certain intangibles
d) Cost to Income ratios shown on a gross basis – i.e. including recoveries as part of revenue
e) “SA REIT vacancy rate” (NEW) – based on estimated “ERV” of vacant properties
f) “SA REIT LTV” - Consistency in the Loan-to-value (or LTV) calculation “
g) Various (e.g. Initial yields, admin cost ratios etc)
• Others includes various recons (IFRS to DPS, Cashflow from Operations to DPS) & Detailed property disclosures
Expected to be effective for financial year ends commencing on or after 1 Jan 2020
Source (for all data): SA REITs Association, SBG ResearchEND
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