South African listed equity was the worst performing asset class in 2022, compared to other equities, bonds and cash.
South African listed equity was the worst performing asset class in 2022, compared to other equities, bonds and cash.
In fact, over the past three years the SA property index is down around 15%, over the same period the JSE All Share index is up 60%.
Simply put – the last couple of years have been a down cycle for the commercial property sector.
But I believe the trend is turning…
Why has property had such a tough time?
The Covid pandemic was bad for commercial property. Hotels were empty, shopping malls suffered and offices were ghost towns…
And while you might think that low interest rates helped property companies – in South Africa most of them hedge their interest rates so the interest they pay is stable over the medium to long run. So, most companies didn’t really get the benefit of low rates…
But an increase in interest rates since the end of the pandemic means the risk-free rate has increased. Investors can now get higher yields on bonds and the money market than they did before. And that sent listed property prices downward.
But the trend is turning.
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Read: Wondering where to put your money? Then go here!
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Why I see the listed property market turning up this year
Listed property in many cases is dirt cheap.
Take Octodec for instance…
The property company has a share price around R10 while its net asset value per share is a whopping R23. What’s more – the company paid 130c in dividends over the past year. That means it is on a dividend yield of 13%.
Or how about Redefine Properties. The company’s share price sits around 380c.
Its latest annual results came in at 84cps in earnings. That means the stock is on a PE ratio of only 4.5! Its net asset value per share is nearly double the current share price at 720cps, and the company paid 42.96cps in dividends in the past year. That puts it on a dividend yield of 11.36%.
Simply put – investors cannot continue ignoring this kind of value proposition on these stocks…
Somewhere investors will stream in again, grabbing the handsome dividend and huge discount to underlying value.
Investors have likely been waiting for a catalyst…
Recent reports suggest shoppers are streaming back to malls
A recent report from the Clur Shopping Centre Index shows that people are streaming back into shopping malls.
For instance – super-regional shopping malls have seen a 17.7% increase in trading density to R46,000 per square meter – meaning a big beat on inflation.
Companies like Attacq have reported many of its shopping centres are back to pre-pandemic levels in terms of foot traffic.
Liberty Two Degrees, another property company recently reported full year results.
The company notes retail occupancy improved to 97.9%. Retail turnover is up 21.9% and foot count at its properties increased by 24.9%.
Its specialised portfolio has 100% occupancy and the company’s hospitality property portfolio saw a 544% increase in net property income.
Property companies used the last couple of years to lower debt levels
If you look at the property sector, you’ll see most of these companies have also been lowering debt levels significantly.
For instance, Redefine lowered its debt to equity ratio from 1.04 in 2020 to 0.77 in 2022. That’s a nearly 30% reduction in debt.
Similarly – Attacq lowered its debt to equity ratio from 1.08 to 0.69 between 2020 and 2022.
These companies did this by lowering capital spend, selling non-core assets and paying off maximum debt.
Thanks to this, the property sector is in a lot better shape than it was early 2020.
Simply put – the sector is dirt cheap. It pays great dividends. Debt is the lowest it’s been in years. And profits are growing again.
This is definitely a sector to keep your eyes on.
If you want to know which stocks I’m buying right now to profit, go here.
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