Now is the time to rescue or restore JSE real estate stocks? This year, three fund managers answered the question after the spectacular recovery of real estate stocks from the unprecedented slump seen in the early days of the Covid-19 pandemic. Apartments
Immobilization investors on the JSE can finally see light after a torrid 2020 at the end of the tunnel.
Real estate stocks have seen a remarkable recovery in recent weeks following the huge 35% drop last year in the SA Listed Property Index (Sapy), which includes more than 20 of the JSE's major property companies. It was the worst performance recorded by the Sapy index.
As 2020 marked the third consecutive year in which such stocks generated lower returns on investments than the general equities (JSE All Share Index), 10 year government bonds and cash, investors supporting property stock are long-suffering (the money market).
However over the past few weeks, the stocks of real estate have rebounded and in 2021 the Sapy index has generated 20.1% of positive total returns – outperforming bonds (total returns of 0.7% for the same period), general shareholders (15.6%) and cash (1.2 percent ).
Ian Anderson, Bridge Fund Managers' chief investment officer stated that the recovery of the Sapy index was linked to the improved sentiment of investors due to economic re-opening following the severe lock-up and deployment of Covid 19 vaccines.
"Sentiment towards South Africa in general and property specifically significantly improved since the beginning of the year with the opening of our economy, and did this faster than most other economies," said Anderson.
More multiasset fund managers and hedge funds, such as Allan Gray and PSG, traditionally avoiding immovable stocks, have taken note of the Sapy index rebirth. They have recently stockpiled in real estate, benefiting from inventories still below their pre-Covid-19 levels and attracting investors' discounts.
The Sapy index is still trading at an average net asset value (NAV) discount of nearly 25 percent. That means that the share prices of the 50,000 immobilization companies on the JSE or Reits, as they are commonly known, are lower than their NAV (assets other than liabilities), indicating a decreasing investment sentiment on the short-term prospects of a given stock.
However, many counter-investors prefer to buy real estate stocks where they have large (and expanded) discounts if they think stocks are attractively priced and property companies' fundamental values remain promising.
Sector investment prospects
Company Maverick asked three fund managers whether the prospects for real estate stocks look promising and whether the time has now come for stock support or bailouts, as the year 2021 could be another year of damage to value.
All fund managers agree that investors have to think about the short- to medium-term discounts that real estate or Reits offer.
"We consider property to be a medium and long-term purchase, although the journey may be volatile and the forecast risks are high in the short term," said Keillen Ndlovu, head of property funds listed at Stanlib.
While stocks offer attractive discounts, investors should be prepared to see short-term real estate volatility. But the worst thing seems to be the huge deflations and uncontrolled shifts in immovable stocks, Ndlovu pointing to asset downs that have slowed down to the single digit compared to an average of more than 10% last year.
Anderson of the Bridge Fund managers agree with Ndlovu that "there seems to be some margin of scope for value growth, if the 'new normal' of higher vacancies and lower market rentals is not achieved to the extent expected at the height of last year's pandemic.
Real estate companies, or Reits, own shopping malls, offices, warehouses and other properties occupied by companies and generally dividend investors regularly in the monthly rental income they generate. Reits have a law (as in the Income Tax Act) that requires them to pay at least 75% (usually from rent generated) of their distributible income as dividends – making this sector a consistent and reliable payer of the dividend in recent years.