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What's going on with the JSE's property stocks?

by , 03 December 2020
What's going on with the JSE's property stocks?
Property stocks on the JSE have had an atrocious year.

Right now, they're still around 46% lower than they were one year ago.

We all know that many landlords, especially in the retail space, had empty shops and tenants that couldn't pay during the hard lockdown…

But the property index has started a turnaround. Since 1 November 2020 the SA Listed Property Index (SAPY) is up 15.81%.

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So, what’s been behind the steep drop in the property sector?
 
The SA property index actually hit its low point by end of October 2020.
 
It became clear that property companies would have to take a knock on the valuations of their properties. Some estimates show that over the next three years the drop in property valuations could be as big as 20%.
 
This is mostly because property companies saw a huge crash in revenue for April and May 2020 – as their retail and commercial clients couldn’t pay rent due to most businesses being closed for the hard lockdown in SA.
 
Thanks to these factors’ property companies have been forced to reduce the asset value of properties in their books – leading to lower NAV’s. Redefine Property for instance reported a R3 drop in NAV from R10.47 to R7.14.
 
Growthpoint property needed to do a massive rights issue to raise cash and pay off debt. Octodec Property also saw a 15% reduction in net asset value per share from R28.47 to R24.13.
 
Due to these big drops in NAV the property companies all have big losses to report to shareholders as well. And that’s been the reason behind the big drops in share prices since the start of the nationwide lockdown.
  
Why are property stock prices suddenly surging?
 
So, since the start of November property stocks are up nearly 16% across the board.
 
Octodec (JSE: OCT) is up 36.6% in the past month. Redefine is up 19.1% in the past month and Growthpoint is up 12.44% in the same time.
 
So, considering all the ‘negatives’ I mentioned below, how can share prices recover like this?
 
Well, firstly – because the move to the down side was probably somewhat overdone.
 
Redefine’s share price is 237c, while the company’s net asset value per share is 714.85c. And that’s after it has been reduced due to the company cutting the value of properties it owns due to the pandemic impact.
 
What this shows you is that Redefine still trades at a discount of 66% to its net asset value per share.
 
Similarly, Octodec shares are at 717c today, while the company’s NAV/share sits at R24.13 – a discount of 70%.
 
And, even with the tough pandemic, Redefine’s revenue only decreased 0.1%. Octodec’s revenue decreased 5.2% and Growthpoint actually saw an increase in revenue.
 
All these companies saw an increase in vacancies. But the increase actually wasn’t as high as you’d expect. Growthpoint’s vacancies rose from 5.8% to 7.6%, Octodec vacancies increased from 11.4% to 15.8% (but the company operates at high vacancies in any case because of its CBD property portfolio), and Redefine’s vacancies increased from 4.6% to 5.6%.
  
Is this recovery sustainable?
 
Property companies will likely see below inflation rental increases for the next year or two. It might even be that rentals don’t increase for the next year at all.
 
But that said, I expect these property companies are taking the chance of low interest rates to repay some debt. Most companies are already indicating they will issue share dividends to investors instead of cash dividends. They’ll then rather use cash to repay debt.
 
This will increase earnings in the end – even if rental income remains flat.
 
I also foresee vacancies to stabilise at current levels.
 
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Retail sales are nearly back at pre-pandemic levels
 
 
Considering this chart, you’ll see that retail sales saw a nearly 50% drop year-on-year in April as the hard lockdown hit. There was a steep recovery each time as lockdown rules were relaxed and by September 2020 the official numbers showed that retail sales on a year-on-year comparison have recovered to only 2.7% lower than for 2019.
 
Based on figures that the retailers are putting out, and observations it looks like by end of 2020 retail sales will be back at 2019 levels.
 
So, the pain from 2020 – will hopefully be behind us as we enter 2021.
 
There are some downside risks.
 
As UIF-TERS payments come to an end, there might be some consumers that will be left without an income. And there are businesses that have closed, with a permanent loss in jobs. But for the most part – much of the hard lockdown damage is reversible – and has already been reversed.
 
Sure – for the next year or two I believe property companies should continue trading at a discount to NAV.
 
They will still have a tough time to lower vacancies and renew leases.
 
But a 70% discount seems excessive. 30%, sounds more reasonable.
 
In the meantime, I believe there’s further upside in selected companies in this sector…
  
Here’s to unleashing real value
 
Francois Joubert
Editor, Red Hot Penny Shares
 
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