The prospects for listed property in 2024

OMIG listed property portfolio manager Evan Robins talks to SAFM host Jimmy Moyaha about the outlook for the listed property sector in the year ahead, pointing out that its prospects are looking more promising, with headwinds on the decline.

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Chapters

• 0:08 Introduction: how do you discern when is the right time and what sort of listed property you need to look into?
• 1:20 What happened towards the end of the year that led to the better setup or the better sentiment, and what do you think that will do for 2024?
• 2:45 Will factors like interest rates, vacancy rates and low economic growth continue to impact the property space? And how do you navigate that as an investor?
• 4:39 Evan Robins shares his thoughts and expectations around what we can see from the SARB
• 6:18 Where will companies leverage off the property market going forward? Will there be growth from new areas?
• 7:57 Evan Robins shares what he sees as a red flag in the property space
• 9:59 Closing

Transcript

 Jimmy Moyaha  00:01

You're listening to the Moneyweb SAFM Market Update Podcast. This segment is brought to you by the Old Mutual Investment Group. 

 Jimmy Moyaha  00:08

Listed property. That's always such an interesting aspect to look at from an investment point of view. I mean, if you think of all of the real estate investment trusts that exist on the JSE, the likes of Growthpoint, the likes of Fortress, that lost their Reit status that we spoke to yesterday, as well. All listed property is always a good option as a viable investment option. But how do you discern when is the right time and what sort of listed property you need to look into? We've enlisted the help of the Listed Property Portfolio Manager at Old Mutual Investment Group to take a look at this. And he joins me now on the line to discuss all things listed property. Good evening, Evan. Thanks so much for joining me. Last year, we saw that was a lot of ups and downs within the property sector as a whole. But listed property in particular had almost a two part year to it, where you saw that sentiment in the first half of the year may not have been as strong with higher interest rates and a lot of uncertainty. But we did see a lot of sentiment shift towards the end of the year and in particular in the last quarter of the year. What sort of happened towards the end of the year that led to the better setup or the better sentiment, and what do you think that will do for 2024?

Evan Robins  01:20

What happened at the end of last year was global interest rates views changed, they pivoted from worrying about hikes and high interest rates, to a view that interest rates would come down globally and that in SA as well. That pivot pushed up listed property prices, which impacted bond yields on which they're priced, but also the earnings of property companies would benefit from a lower interest rate environment that was expected before. And that's what drove it, simple as that I would say.

Jimmy Moyaha  01:47

Evan, going into 2024, do you think that this would now look different? Do you think that the momentum from the last quarter of last year will continue into this year? Or do you see a couple of different trends emerging as we go into 2024? 

Evan Robins  01:59 

The interest rate environment, market expects cuts but it's getting a bit less conviction there, you're seeing a bit of wobblies in what people think, it still expects cuts this year, it's just the timing of that. But I think what we didn't reflect last year, and I think could reflect this year, was the actual property fundamentals on the ground are stabilizing. You're not in the sector that's continuously deteriorating, as we had before. This is independent of interest rates, because of the interest rates going up, you didn't see that in the numbers, the property results were still tempered at best, because interest rates were just washing away all the good news, in the sense, or the less bad news. Hopefully this year, we're still gonna have a bit of that. But hopefully we have a line of sight into some of the better stabilizing fundamentals on the property side and the market will start giving those some credence. 

Jimmy Moyaha  02:45

Evan, would you say that the market, especially on the listed property side, is over the previous things it had to contend with? I mean, there was obviously the pandemic that had a disastrous impact on pretty much all sectors of the economy. But we are still contending with very difficult things that can affect sentiment within the property space, things like interest rates, vacancy rates, loadshedding, low economic growth, and low demand. Do you think that these factors will continue to have a significant impact on the property space? And how do you then navigate that as an investor, as a portfolio manager, if you're looking to say, okay, listed property has to be part of my portfolio, but I have to think about these other conditions. And on top of these other conditions, things like elections are also there. How do you then position to navigate all this? 

Evan Robins  03:31 

So, certainly the fate of listed property, all property, is in the hands of the economy. I mean, it's a sector that needs economy to cause demand to increase, which causes rents to increase. So, in that the fate of the lister sector is very much in terms of SA economic development, the SA bonds as well, which reflect the pricing of property, election and certainly all those sort of things. And that affects all SA asset classes. Another factor over Covid was property rental levels were too high, even before Covid. So, structurally, they were too high. What we saw over the Covid period, in fact it started before the Covid period, is we're basing down. So, we'll make up numbers. You used to pay R100 and now you pay R50 for example, it gradually went down. So now, we're level where that's stabilized. As rents are expiring, a lot of it's already - R50, I'm making up numbers. So, you're not - you don't have as much of that negative impact coming through. And that's a base you can grow. So, we still have the challenges from the messy economy and it's not fantastic. But a lot of the rebasing and the negativity that's happened already is in the base already. We've gone through it, it's there. You're not going to get extra surprises from it. I think market analysts are starting to realize that. 

Jimmy Moyaha  04:39 

Speaking of things the market has to contend with and realize, what are your thoughts on the actions from our central bank? Obviously, interest rates have a significant bearing on returns, on pricing, on everything that relates to listed property. What are your expectations around what we could potentially see from the SARB, but also what would your ideal scenario be from the SARB? Obviously, lower rates do affect what rentals come through, but they also affect the financing side of the property space. 

Evan Robins  05:09 

I expect with consensus, the rates coming down in South Africa this year, maybe rates coming down less here than elsewhere globally, but we also didn't see the lower rates, and in spite of that, that they had elsewhere either. But my main concern actually isn't this, the NPC, the SARB, it's actually the bond yields. The interest rate that SARB sets effects how much interest companies pay, which obviously is critical in earnings, I mean, and that if I look at my numbers, last year, and this year, you know, we spoke about how things went up last year, you can see a noticeable difference in the earnings numbers I'm projecting based on the lower interest rates forecast. But the bigger picture is the bond yields, how that affects the prices of property. With bond yields over 11%, you want quite a high return from property to justify the purchase, which is, you know, that sort of crowding out is quite a dampener on interest. So, if the SARB is to lenient on inflation, then those are going to go up. So, then you got to look at it all together. But I think there's a lot of focus on the short-term interest rates, which obviously are important, but the bigger picture are the longer term bond yields, and the outlook on that on property, because that really affects the rating of the company's actual capital values more than just their earnings.  

Jimmy Moyaha  06:18 

Evan, let's look at these companies. I mean, some of these companies have really, really strong balance sheets, and some have had their balance sheets negatively impacted by some of the other conditions that we've seen, I mean, the cost of loadshedding and having to switch to solar, the cost of having office vacancies, that's had a bearing on balance sheets to a certain extent. Where do you see some of the stronger companies leveraging off of the property market going forward? And do you see growth coming from any new areas, whether it's listed companies sort of going offshore with their portfolios and expanding their reach? 

Evan Robins  06:53 

I think the listed sector has done well to keep the balance sheets under control. It was quite tough certainly over Covid. I still think balance sheets need companies to be very careful with balance sheets, because with the bond yield environment, we spoke about the value that the market is pricing in listed property well below in a V, well below what the values are saying. So, if you take the valuations that market is implying and assume the property company's balance sheets are worth that, the balance situation doesn't look as great, not terrible. We're saying that's not as great. So, I think companies still have to be cautious. Watch the balance sheets, not go out, it's not the time to be aggressive on the balance sheets, even if they're feeling more positive. Things aren't out of the woods yet until there's more certainty around the physical property prices. And that applies to international expansion as well. I think things are still quite fragile, even though we were under control. And we see valuations have stabilized, even increasing slightly on the actual entity side, they've stopped falling, which is part of the whole theme of things having stabilized.  

Jimmy Moyaha  07:57 

Evan, as a Property Portfolio Manager, if you're to give one piece of advice to whether it's a retail investor, a fellow  institutional investor, what's a red flag for you in the property space? That if you hear this, whether it's a macro development in the economy, or whether it's a development within a company, where you're going to say, hang on, this is of serious concern in this year. 

Evan Robins  08:24 

This year, what concerns me is a lot of SA companies went overseas, because the opportunities looked better and interest rates were really low. We have a lot of debt that took out on the back of that was at very low levels when rates were low. And now they've got to contend with not just this year, in the years forward, it's not just SA companies, it's global companies as well, they have to refinance now, higher interest rates, obviously because interest rates are much higher, and it was abnormally low. And in debt markets, which are not that welcoming, are not that open. Now, the change in interest rates we discussed has certainly made things better, and certainly an improvement from where it was last year. But it's still a concern to me in the line of sight where there's a lot of debt in Euros, I'm assuming in a few years’ time at low interest rates, where that will settle, what the impact's going to be, and how they're going to fund that. There's not that much transparency there. Different companies have got different levels of transparency, but you know there's a challenge coming and it's gonna take all the management skill to navigate through those through that. And that is global debt, so they've got debt. We've discussed South Africa is refinancing the offshore debt they've got in offshore markets.  

Jimmy Moyaha  09:30 

So, just managing those debts from a balance sheet and asset allocation point of view and the repayments around that but also managing the yields that listed properties would then offer into the market. We'll leave it at that, Evan, thanks so much. That's Evan Robins, who is a Listed Property Portfolio Manager at the Old Mutual Investment Group, sharing his insights and his thoughts around the listed property space and the areas of opportunity that lie in that space. The segment was brought to you by the Old Mutual Investment Group. 

Jimmy Moyaha  09:59

Unlock the power of performance with Old Mutual Investment Group, where our expertise, experience and ambition meet to deliver long-term solutions that help your money grow. As a black-owned investment management firm in South Africa with above benchmark performance and five-star Morningstar rated funds, we have the strategies you need to diversify your investments locally and globally. Invest with Old Mutual Investment Group today. Go to oldmutualinvest.com/institutional. Old Mutual Investment Group is a licensed financial services provider. Full disclosures can be found on the website.

Jimmy Moyaha  10:34

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