2019 Outlook For REITs

South African Real Estate Investment Trusts (REITs) have double-digit returns in their sights for 2019 with performances driven by their current forward income yields and capital returns based on income growth.

In December last year, CFO of Emira Property Fund, Greg Booyens, announced that the company had successfully refinanced over R1.2-billion of its debt. The REIT refinanced maturing secured listed Domestic Medium Term Notes through the issue of new three-and five-year notes, with the aim of raising R330-million and the group received bids for R813-million. This subscription enabled Emira to choose its split between note terms. “We are extremely happy with the results, especially because we were able to improve the pricing of the notes,” Booyens noted at the time of the announcement.

According to Catalyst Fund Managers investment analyst Mvula Seroto, the REIT sector in 2019 will attract positive returns in line with the historical annualised 10-year total return of 14 percent.

Echoing his sentiments, Capricorn Fund Managers South Africa analyst, Howard Penny says in a steady valuation environment, REIT returns may touch double digits. This is supported by nine per cent sector distribution yields despite lower distribution growth around four to five percent.

“Despite treacherous rising global interest rates, historically high yields remain the greatest supportive force for 2019 and the medium term,” he says.

MARKET FORCES

Offering a longer-term view, Anchor Stockbrokers real estate analyst, Wynand Smit expects the sector to continue performing “at attractive levels” with listed properties delivering total returns of 13 to 14 per cent annually. However, without an improved economic and political outlook, 2019 will reflect “marginally lower” returns than the long-term forecast. If growth expectations do improve, the valuations will be “compelling” as REITs provide liquid, lower-risk property investments and are actively managed by companies with robust governance oversights and performance-driven management teams.

Less optimistically, Renprop MD, Chris Renecle says the country’s commercial property market experienced tough trading conditions in 2018, especially in the office space sector albeit there was “some movement”.

“Sales have mainly been to end users as opposed to investors and have predominantly taken place in the R3-million to R50-million brackets…slow recovery, growth or change is expected in the commercial space in the year ahead,” he says.

DEALS IN ACTION

However, a reflection of the sector’s potential comes via a restructuring deal concluded in July. Legal firm, Cliffe Dekker Hofmeyr (CDH) completed a transaction for listed REIT client – Tower Property Fund, involving the restructuring and the introduction of a new investor ‘Oryx’ listed on the Namibian Stock Exchange.

The initiative saw the formation of Tower subsidiary, Mauritian-based TPF International, to hold Tower’s R1-billion Croatian property portfolio and obtain undertakings from Oryx to make an aggregate R300-million investment into the portfolio, primarily funded by Absa Bank.

CDH director, David Thompson says the deal significantly raised R300-million despite the challenges facing smaller REITs and involved four legal jurisdictions.

Offering commercial property loans to assist with development plans, Absa’s footprint stretches across sub-Saharan Africa
and provides cross-border funding solutions in other jurisdictions.

EXPOSURE TO THE BEST

SA REIT marketing committee chairman, Andrea Taverna-Turisan says investors and analysts know “with reasonable certainty” what to expect from REIT investments in 2019. The country’s REITs are exposed to the best commercial properties in South Africa and offshore.

Underpinning their property income are lease agreements where rentals are contracted and escalate annually at predetermined rates, typically 6.5-8%.

“Besides positive performance prospects for 2019, factors market commentators believe will make SA REITs appealing include improved corporate governance, historically high yields and the good value to be found in REIT share prices,” Taverna-Turisan concludes.