Lagging dividend growth reflects pressure on SA property market
October 22, 2019

Business Live Article By Nastassia Arendse

21 October 2019

After experiencing its worst year in two decades in 2018, the R565bn listed property sector has struggled to gain any sustainable momentum in 2019.

Not only has a weak economy put pressure on share prices, but dividend growth is also muted. In 2018, the SA Listed Property Index (Sapy) suffered a loss of 25.26%. Though 2019 has been better, the sector is up only about 3.1% taking into account dividends and share price growth.

Only two of the 17 listed property firms that announced results in the latest reporting period outperformed their dividend expectations. Some were in line with their market forecasts but most underdelivered.

“It’s a tough time for listed property management as they have to work hard to fix the balance sheets, bring the debt levels down, manage rising vacancies, arrears and bad debts, and get rental growth where possible, which is challenging at the moment,” Keillen Ndlovu, head of listed property funds at Stanlib, told Business Day.

The underlying portfolios in the commercial real estate market, which is made up of mostly offices, retail and industrial assets, are also struggling with poor rental growth and high vacancies.

Commercial property brokers are also feeling less optimistic. In FNB’s third-quarter Commercial Property Broker Survey, the percentage of brokers experiencing business conditions as satisfactory declined compared with the prior quarter, from 64% in the second quarter to 49%.

The broker confidence survey is modelled after the FNB Real Estate Agent Survey and samples commercial property brokers in and around the six major metros. Each quarter, 100 brokers answer questions indicating whether conditions are improving, getting worse or remaining the same.

The answers are converted into an index.

“There are a series of questions we ask the brokers, such as their perception of activity levels, demand and supply dynamics in the property market, and perceptions of rental market vacancy rates,” said John Loos, property strategist at FNB Commercial Property Finance.

FNB says the survey history is too short to determine what the seasonal effects throughout each year would be on activity ratings for the office, retail and industrial property sector.

The term ‘‘activity’’ is as experienced by a broker, and can include anything from indications of interest in buying or selling, and inquiries or viewings related to potential buying or listing, to transaction levels.

Grant Kirchmann, a director at JLL SA, said there are challenges in the industry due to the slowdown in the economy.

“Many companies are adopting the wait-and-see approach given the economy is showing little sign of growth. SA companies are hesitant to spend money on real-estate needs without seeing a clear future of growth.

“As a result, companies are adopting a more conservative [approach] by consolidating or optimising their real estate, meaning companies will choose not to relocate but rather regear leases or hope for rental reversions at the time of renewing.

“Many corporates are looking for sustainable, flexible lease terms while dealing with the prevailing economic headwinds,” Kirchmann said.

FNB respondents in the owner-serviced market were of the view that financial pressure due to the dire state of the economy was the strongest driver of owner-serviced commercial property sales and leasing in recent times.

The greatest level of financial pressure-related selling or relocation was seen in Tshwane, accounting for 56.8% of sellers, but with Cape Town (55.3%), Nelson Mandela Bay (52%) and Greater Johannesburg (46.8%) not far behind.

John Jack, CEO of Galetti Properties, disagrees, saying lease renewals far outweigh relocations in the current market. “The cost of relocation, including fit-out, is a significant capital expenditure and this has led to occupiers taking the decision to renew lease agreements on better terms as opposed to relocating to more suitable premises,” he said.

Kirchmann shares similar sentiments. About five years ago, “when vacancies were not under as much pressure”, it was a landlord market.

“In SA, fewer corporates are forecasting growth, unlike the corporate market in the likes of Australia or Eastern Europe. In such markets where corporates are experiencing growth, new developments are being taken up while still occupying current buildings, meaning that vacancies don’t increase each time a company relocates,” he said.

Due to the uncertainty about the country’s credit rating and Eskom’s future, many occupiers continue to adopt a wait-and see approach. While the level of new-office development has been trending down since 2015, the demand for space is growing at a slower rate, a situation that is keeping the broad sideways trend in the overall office vacancy rate intact.

Looking ahead to the next six months, brokers expect moderate increases in activity in the office, and industrial and warehouse markets. Activity is likely to remain unchanged in the retail market.

 

Galetti

Marketing Manager at Galetti

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