by Marc de Villiers | Jul 13, 2020 | Blog
Last night’s announcement by President Ramaphosa highlights the massive impact COVID -19 is having on all of our lives. Allied to a booze ban and a curfew, we are going to have to deal with many pressing economic decisions and consequences in the coming weeks, not least of these is, should we take a loan from the International Monetary Fund.
My view is that we don’t have a choice and the country is simply out of options. The conditions of such a loan are likely to be onerous and the prospects of default are very real, but we have to take a massive $ 4.2 billion loan (at least) if we are to have any prospect of moving the economy forward and saving jobs and livelihoods.
If Finance Minister Tito Mboweni was an artist, the picture he painted in his Supplementary Budget was not a pretty painting. The portrait of South Africa is terrifying, Edvard Munch’s The Scream is a good comparison. Following the emergency budget, there is going to be much screaming, not least from the trade unions as job cuts are recommended to try and get government spending under control.
However, the true screams of anguish will come when terms and conditions of the large loans the government has so far procured from international banks and financial institutions are revealed, particularly the loan from the International Monetary Fund (IMF). The IMF loan already applied for, of $4.2bn (R72.8bn), will carry stifling conditions. But the whip will be seen when the government almost certainly has to apply for a second longer-term, much larger loan from the IMF. Some conditions will be appreciated by private business and South African citizens, if not by government. Many, though, will be stifling. And they will be around for a long time to come.
Chances are South Africa will have to approach the IMF again for a much larger loan of around $18bn (R298bn), says Ciaran Ryan, an analyst writing for website Moneyweb.
That loan will carry the big stick, for example reforms of SOEs and product and labour markets, he says.
Even with the large loans coming in from abroad, they will probably not be enough to get the economy going again. That could have serious consequences, one being the chance of South Africa defaulting on repayments of its international loans.
“We do not face default yet but when that eventually happens then most international credit lines will not be available anymore,” says Dawie Roodt, chief economist at the Efficient Group. Marius Roodt, senior policy analyst at the Institute of Race Relations (IRR), has a similar view. “There is a serious risk that the government could default on its loans. This would lead to a severe weakening of the currency, as well as the failure of the state to fulfil its duties. It could lead to a severe economic crises in the country unless South Africa gets its debt under control very soon.”
The country already seems to have a severe economic crisis. Yet it could get worse. Mboweni sees this, with the Treasury predicting that revenue will be R1.1trillion instead of the R1.4trillion projected in the main budget in February. Proposed spending is now R40bn more than projected in February. Less income and more expenditure suggests a sure path to bankruptcy, a path many cynics would say the country has already arrived at. This gap between income and spending will mean, Mboweni said, that debt will rise to 14.46% of Gross Domestic Product (GDP), instead of the 6.8% planned for in February. Apart from showing how useless budget predictions are, it also indicates a country not yet bankrupt, but dangerously close to that abyss.
To plug the expenditure gap Mboweni needs additional funding, and that will come from taxpayers’ money. But SA Revenue Services has indicated that due to the sharp slowdown in economic activity, tax collection will be around R285bn lower than expected. What does this mean for the already hard-pressed taxpayer. Higher tax rates?
“The economy contracted by 7.2%. This represents the largest contraction in 90 years,” says banking analyst Simon Stockley. “Of every R1 of tax revenue collected, 21 cents are now being spent on servicing debt.”
All the New Development Bank (NDB) and IMF loans repayments will come from taxpayers, the bulk from individual taxpayers. Is this affordable?
“No. That is why Tito can’t increase this tax much more,” says Dawie Roodt. But even though the tax rates may not be much higher, are individual taxpayers going to be burdened with higher tax rates for a long time to come? “Absolutely”, is Dawie Roodt’s emphatic reply.
Marius Roodt says higher taxes are not fair. “South Africans are already overtaxed. The government should look to cut expenditure by refusing to bail out failing SOEs, cutting the state wage bill, and implementing policies which encourage economic growth, which will lead to higher rates of employment.”
These are conditions that are likely to come with the next IMF loan. We still wait to see exactly what these conditions will be. Sakhile Hadebe, international relations lecturer at the University of KwaZulu-Natal, warns of the still “undisclosed” terms and conditions of international loans. “The country is in a crises, any assistance is welcome although it may be risky. It is an open secret that these international institutions we belong to have an interest in our country. It will be interesting to know the condition of these loans.”
Conditions likely to come with the next IMF loan will probably include cutting the public sector wage bill, up by more than 40% over the past 12 years. “I hope so,” says Dawie Roodt of an IMF imposed cut in public servants pay. “That is the idea.”
“The loan is likely to come with conditions demanding many structural reforms to our economy, such as a cap on wage expansion for government employees and curtailing further borrowing by SOEs,” Stockley says. “We have to accept and embrace those conditions.”
There is another avenue to fund government expenditure to cut debt Mboweni strongly hinted at in his budget. Using pension fund money and assets. “Yes, I think the threat is real. We have seen comments from a number of senior government and ANC officials that pension funds could be tapped,” says Marius Roodt.
If this happens, will it be another case of the government using citizens’ money to pay for their failures? “Yes, the government has squandered the money of taxpayers over the past decade and is now looking to people who have been prudent and saved to fill funding gaps,” says Marius Roodt.
Stockley says governments should just get on and do it. “To fight the notion that we can go it alone is akin to trying to hold back the tide.”
All eyes will now be on the next emergency budget in October to see what government plans next. One intention will almost certainly be to raise an extra R40bn in tax revenue. An inflection point is approaching where taxpayers just can’t afford to pay anymore for government’s IMF loans.
Another grim painting by artist Mboweni? Roll up to get your tickets to the horror art exhibition.
by Marc de Villiers | Jun 29, 2020 | Blog
The first signs came when Nedbank issued a trading update in late May. Earnings for the half-year to fall by at least 20%, bad debts to rise. This was not unexpected but was still a cold reminder that South African banks, much like banks overseas, are entering a tough period.
Warnings from all the other banks soon followed. All the conditions are against the banks: A flat economy, many clients in financial distress, and interest rate cuts adding up to 275 basis points (bps) so far this year. How bad is it going to get?
“We issued our trading update at our AGM, which happens to be the first of the bank AGM season,” says Mike Brown, CE of Nedbank. “All the other banks have issued similar warnings. It’s a JSE requirement once a company is reasonably certain headline earnings will be more than 20% down on the prior period.”
How bad is it going to get? “The economic fall-out of the Covid-19 lockdown will have a significant impact on the banks’ non-performing loans and credit losses,” says Jonathan Wernick and Alec Abraham, equity analysts at Sasfin Securities. “And the low confidence and negative endowment effect of low interest rates will drag on earnings, not only in 2020 but extending into 2021. While the Bank Index has recovered from its lows in March, it is still some 36% down for the year to date.”
But the situation for banks is not as dire as it could be. Kokkie Kooyman, a portfolio manager and director at Denker Capital, sees opportunities in the gloom. “Based on our research and interactions with management, we believe very few banks will generate losses in in 2020 or 2021 and that they’ll continue to grow shareholder value. In terms of valuations, the financial sector is currently at a larger discount to the MSCI World Index than ever before – indicating it is at the epicentre of fear.
“The fears of seemingly unquantifiable risks have pushed share prices down to levels that create excellent investment opportunities.”
Looking at Nedbank Brown says it’s very difficult to forecast accurately in the current environment. “While we know this year’s earnings will be down on last year, I’m sure that over time bank earnings will recover to pre-Covid levels. What is uncertain is how fast the economy will recover and as a result how fast this recovery in bank earnings will take place.”
Looking at the reasons for banks’ underperformance, banking analyst Simon Stockley, who also heads his own company Catalis, a boutique investment and advisory service, says a combination of factors has created a “perfect storm” for banks.
“Banks are making less revenue from interest charges. Lack of deal flow is likely to affect earnings in the short term and increasing levels of unemployment will make it difficult for average South Africans to service their debt obligations,” Stockley says.
Perhaps the biggest problem for banks is low interest rates, at a low not seen in South Africa for many years. That’s squeezing banks’ net interest income and income margins, which in turn knocks down earnings.
Are more interest rate cuts to come, which will further choke banks’ earnings?
Kooyman says he has no clue what the SA Reserve Bank might do next. “They can’t cut much more. If SARB cuts more they risk further currency weakness. It partly depends on the appetite for emerging markets (EM). If US growth strengthens then capital will flow back to EM for a while. And then the SARB could risk another rate cut.”
Kooyman says globally banks have adapted to lower interest rates by increasingly digitizing and cutting costs. “That is, cutting costs at braches and by less people. In South Africa the unions won’t like that so the process will be slower.”
“Our current forecast is for rates to remain flat from here, with the possibility of one more 25 bps cut this cycle,” says Nedbank’s Brown.
But eventually, earnings growth will start to recover. It might take a long time. How long, for earnings to get back to pre-Covid-19 levels?
“It’s likely to take some time. I would say at least three years. Yet I expect all the banks to bounce back – eventually,” says Stockley.
Kooyman says each country differs according to the depth of the recession, the paid taken and the strength of the recovery. “The US is one of the best cases. We see banks there back to 2019 profit levels by the end of 2022, maybe 2023. In South Africa, I think profit levels will be back by 2023, the latest 2025.”
Brown says in the global financial crises, South African banks’ earnings peaked in 2008 before dropping in 2009. “And three years later, in 2011, they again exceeded the 2008 peak. Much will depend on South Africa’s policy response to the crises.”
With banks under pressure, bank shares have also declined. So what should potential investors do, is now a good time to buy bank shares?
“If you are a potential investor in the sector adopt a wait and see attitude and see how the situation and pandemic develops,” says Stockley. “I suspect prices will still fall before they start to come back. If you are invested in the sector, stay invested. And if you’re thinking of opening a bank anytime soon, don’t.”
Kooyman says bank shares in South Africa are attractively priced. “Like banks all around the world, the quality of lending portfolios is high. Most important to bear in mind in 2020 is that: unlike previous crises, this one doesn’t follow a lending bubble; and banks’ balance sheets have been cleaned up and they hold double the capital they did in 2008.”
Abraham and Wernick from Sasfin Securities don’t believe the current prices of banking shares fully reflect the Covid-19 fallout and the weak medium term South African economic outlook. And as they have said, the Bank Index is still about 36% down over the year.
One point all the commentators agree on is that now is not a good time to start a bank. But while your bank gets poorer, though it will eventually recover, why not get richer buying bank shares.
by Marc de Villiers | May 27, 2020 | Blog
My recent take on the SARB’s rate cut announcement. Bottom line; it’s a good start but he should have gone a whole lot further and it is now time for other sectors in government top play their part.
The plea from citizens as the bowl of the economy is scraped bare
By Shaun Harris
The recent 50 basis points (bps) interest rate cut by the Reserve Bank was no surprise. Financial markets shrugged it off. Hard-pressed consumers largely welcomed it but also shrugged it off. Which begs the question: should Reserve Bank Governor Lesetja Kganyago have done more? And what should he have done, and what should he do in the future?
“I would have expected 100 bps, but even 50 is useful because lowering debt repayments means there’s a little bit of extra money in the pockets of consumers,” says Economic Justice and Dignity spokesperson Mervyn Abrahams.
Before the Reserve Bank’s announcement of the latest cut banking analyst Simon Stockley was expecting 50 bps but hoping Kganyago might go further. “I do genuinely believe the Governor has latitude to go even further, say 100 bps, but is unlikely to do so, given his historic cautionary approach to monetary policy.”
Now that we know how much lower interest rates are, what do we expect the Governor to do next? “I would be surprised if there was another rate cut so soon after the previous one,” says Magda Wierzycka, CEO and founder of asset management company Sygnia. “Rather I would expect that they will want to ensure liquidity in the market through further bond purchases, as well as stabilizing the banks’ balance sheets. South Africa’s prime interest rate, which is linked to the repo rate, is still relatively high. Consequently there is still further room for rate cuts in the future.”
However interest rate decisions and other means to stimulate South Africa’s crippled economy effectively fall under government. And ultimately, President Cyril Ramaphosa should be, and “should be” must be emphasized, calling the shots.
“The one thing we did not do when the lockdown was declared was to ask questions,” says widely respected political analyst Dr Ralph Mathekga. “The lockdown brought with it a freeze on many important political processes.”
“Excessive use of executive power during the lockdown is dangerous and our politicians must always remember that South Africa is a constitutional democracy and that the lockdown does not mean that the constitution has been suspended even though a few rights were,” says Mathekga.
On Sunday night, May 24, President Ramaphosa announced fewer restrictions when the country moved to Level 3 lockdown. Once again, no surprises, the JSE shrugged off an expected boost to share prices. “The severe interruptions to supply chains, along with a huge loss in incomes, a plunge in the circulation of money and the high levels of unemployment have damaged both supply and demand, while Level 3 still has a number of restrictions to the smooth functioning of the economy,” says Annabel Bishop, chief economist at Investec.
Wierzycka has clear views on the benefits, and restrictions, of Level 3. “It is possible that the relaxation to Level 3 ensures that certain sectors of the economy can spring back relatively quickly. The informal sector is also fairly flexible. However some large employment sectors, such as tourism and aviation, will not recover for a long time.”
“There are no obvious domestic substitutes to absorb the number of unemployed people.”
Stockley is also concerned at the possible spill-out from unemployment. He urges government to recognize how serious the situation is, “with current levels of unemployment, social disobedience and civil unrest is moments away.”
“Government must engage with business constructively. Forget Stalinist centrally controlled solutions to the crises. It is only through forming a social and economic compact with business and citizens that we will emerge from the crises,” says Stockley.
Government’s response to handling the crises through the levels of the lockdown reveals serious splits in the Cabinet and destructive rivalry at the very top.
Government behavior was initially laudable, with the lockdown and mobilizing business support measures, says Sasfin Securities in a report on May 25. But it was “thereafter laughable, with policy confusion and ludicrous measures.” It highlights, says Sasfin, “ongoing factionalism with the ANC and the strength of the corrupt old guard.”
This factionalism has been fed by many rumours. Most serious is of a rift between President Ramaphosa and Minister of Co-operative Governance and Traditional Affairs, Nkosazana Dlamini Zuma. It dates back to before the elections, her role now as possible successor to Ramaphosa should he be indisposed, and the strong support for her with a faction of the ANC.
Rumours, yes, but some rumours have a nasty habit of turning out to be true. It seems Dlamini Zuma’s power extends way beyond her rabid-like fixation on banning smoking.
“It’s time now for all other role players in government to step up to the plate and make a contribution to saving lives and the economy. Inactivity and hesitance is likely to prove more deadly than the pandemic. It’s time to reopen the country, Mr President,” says Stockley.
Wierzycka says “people have run out of money and out of goodwill to comply.” She fears the implications of a possible IMF bail-out. “I don’t have the answers as to what the government should be doing other than to say that it needs to listen to economic and medical advisors rather than making up rules on the fly.”
Bold steps need to be taken. Now.
by Marc de Villiers | May 1, 2020 | Blog
Cause for Concern ….
The banking sector is likely to be forever altered as a result of the Covid-19 pandemic. I do see the South African banks surviving the crisis, but expect some individual stress and strain.
See my take and that of Mike Brown (CEO Nedbank) below, in conversation with Shaun Harris.
By Shaun Harris
27 April 2020
Banks exemplify solidity. Love them or hate them, people need them for loans, savings and investments. But what now, and what of the future when the coronavirus has eventually passed? What will the banking sector look like then?
Even without the benefit of a crystal ball informed views offer various scenarios of what banks will look like post Covid-19.
“These are unprecedented times for countries, businesses and banks globally – no one can make accurate predictions in this environment, but what we do know is the Covid-19 pandemic and its impact will eventually pass,” says Mike Brown, CEO of Nedbank.
Bank’s financial results and outlooks, however guarded, do give some indication of what banks are going through now in the lockdown and what banks might look like on the other side.
Banks were under pressure some time before the outbreak of the virus, from the ailing South African economy, the rating agencies downgrades, and intense competition between the banks for customers. Then Covid-19 arrived and matters got worse.
It’s reflected in recent results and trading statements from banks. On April 22 Standard Bank released a statement saying “in 1Q20 earnings attributable to ordinary shareholders were 27% lower than in the comparative period.”
A decline of 27% is quite a knock, but the statement goes on to say client credit impairment charges were “significantly higher” in the first three months of the year as businesses struggled with the economic slowdown and nationwide lockdown.”
Nedbank has also taken knocks. Earlier in April more than R5bn was wiped off its market capitalisation in one session on the JSE. Mike Brown puts this in context.
“Our share price on that day reflected the fact that it was the day we traded ex the dividend of R6.95. This is an important aspect many newspapers missed, but investors understand. Our share price has underperformed in 2019, one reason possibly being we are more SA focused than peers and in 2019 the SA economy underperformed versus expectations.”
Simon Stockley, among his various roles a banking analyst, is not too concerned about recent bank results. “I don’t see large scale collapse or consolidation in the sector. Our big five banks are all adequately capitalized, well run and generally have displayed conservative lending criteria, as characterised by the 2008 financial crises which saw, after some initial volatility, all of the major banks surviving the crises and emerging stranger.”
Less upbeat is Ingham Analytics, who view Covid-19 as the “coup de gráce for banks”. They have warned their readers repeatedly about exposure to banking stocks, and say the recent cut in interest rates reinforce their bearish stance.
One bank in serious trouble is the government-owned Land and Agricultural Development Bank, commonly known as the Land Bank. On April 22 it warned creditors that it might default on some R738m of indebtedness scheduled to mature by the end of April due to “a cash crisis it was experiencing.” It also warned of potential defaults on payments on its R50bn bond program.
Yet the Land Bank is a different animal in the banking sector. But still an important animal, providing capital to the farming community. That’s important now. As South Africa starts to ease out of the lockdown farming will become increasingly important. Pre-lockdown stock piling saw many consumers stocking up on frozen and tinned foods. With the retail market returning to normal there will surely be increased demand for fresh produce.
While Stockley does not expect any banks to fail, he does warn that certain specialist lenders will be more adversely affected than the main banks. “Capitec and SA Homeloans are two such cases in point. Capitec because the majority of its lending is in the unsecured sector, where its customers are likely to be under the most financial strain. SAHL because of its unique funding model and reliance on the capital markets for ongoing liquidity.”
Stockley knows SAHL well. He founded the organization and was its first CEO. But while he expects both above examples to suffer stress to their funding models in the short term, “I expect them to both survive.”
But what of the post Covid-19 future for banks? Are plans being put into place now? Nedbank’s Mike Brown responds with an emphatic “Yes”.
“We have a shorter-term focus on resilience and how we operate in lockdown as an essential service. A medium-term focus on how we will transition out of the lockdown, and then a longer-term focus on reimagining how we operate and what we have learnt in this time and as a result what banking may look like in the future.”
Stockley says his prediction is for a more collaborative approach to banking and customer relations. “I see banks adopting a more partnership model to their interactions with customers. Risks and rewards are going to have to be shared more equitably than they have been in the past. In the post Covid-19 reality, they are going to have to nurse their customers back to full health. Those institutions that understand this shift in the balance of power are likely to thrive.”
Back in 1971 the band Traffic produced their greatest album, The Low Spark of High Heeled Boys. In the title track, Steve Winwood sings:
The percentage you’re paying is too high priced
While you’re living beyond all your means
And the man in the suit has just bought a new car
From the profit he made on your dreams
But Winwood goes on:
But today you just read that the man was shot dead
By a gun that didn’t make any noise
And it wasn’t the bullet that laid him to rest
Was the low spark of high-heeled boys
For banks, there is both a warning and encouragement in these words. They have to help clients, sensibly of course, but hard-pressed customers are on the brink of revolt and need help.
Traffic never explained what the “low spark” was in their song. Applied to South Africa, it’s like President Cyril Ramaphosa understood the low spark. He knows starving people who cannot buy bread are on the point of revolution, and is trying, hard, to ease that.
We will all hope he has extinguished the low spark in time.
by Marc de Villiers | Mar 4, 2020 | Blog
Your Home is Your Castle
My recent ruminations on the state of the residential property market as discussed with Shaun Harris during April 2020.I think realistically there is cause for optimism – the sector is transforming itself and more importantly it is going to be a very long and windy road back. Enjoy!
THE IMPACT ON YOUR BUSINESS AND HOW YOU HAVE ADAPTED TO MITIGATE IMPACT?
The global pandemic represents, in my view a true ‘black swan’ event, whose impact is likely to be felt long term and will undoubtedly alter profoundly how business operates globally. Unlike previous predictable events (say the Financial Crisis of 2008), we truly have no idea how this one is going to play out and I would caution against making firm predictions, based on insufficient data and simply not enough time to analyse the full effects.
That being said…
APART FROM LIQUIDITY ISSUES, HOW HAVE COMPANIES BEEN HARDEST HIT?
Clients are anxious and frightened. They are concerned about not only their own financial future (and in many instances that of their staff) but also worried about their physical health and safety given the vast income inequality that exists within the SA economy. Obviously, many businesses have had to close their doors or alternatively operate remotely placing greater reliance on information technology and connectivity.
AND THOSE THAT HAVE BEEN ABLE TO RIDE OUT THESE INTERRUPTIONS, FOR NOW, WHICH RISK MANAGEMENT SYSTEMS ENABLE THEM TO DO SO?
My advice to clients has been its “OK” to worry. We are entering into uncharted territory; fear is a natural outcome, but just don’t let the fear promote paralysis. Keep moving forward, one step at a time, controlling that which you can control and letting go of that which you can’t.
Those in the tourist, travel, leisure and event industries have been hit the hardest. Going forward, as the financial impact of the virus begins to bite deeper, those industries that rely on ‘discretionary spend‘(e.g. beauty salons, fashion brands, gyms etc) are likely to be adversely affected as consumers are forced to cut all extraneous expenses from their budgets.
Those institutions that remain nimble, flexible and capable of pivoting their business models in the short-term are not only surviving at the moment, but many are actually thriving. By way of example, I have a who client who runs a 500-seat call-centre out of JHB. About 10 days before the shutdown he got laptops to the majority of his call centre operators and they are continuing to service their clients from home, unlike many of his competitors who have been forced to suspend operations. Clients are
clamouring for his service, so much so that he is planning on expanding his operation by at least 250 seats, during the shut-down.
For me it is all about remaining flexible, responsive, adaptable and responding to opportunities when they present themselves.
KEY TAKEAWAYS FROM THIS PANDEMIC FOR BUSINESS OWNERS IN PREPARING, AS MUCH AS POSSIBLE, FOR A SIMILAR EVENT IN FUTURE?
By continuing to add value to them and their needs during the crisis and they will remember you when things return to the ‘new normal’…as it will inevitably do.
Adopt an open and transparent communication policy with staff, customers and suppliers. ”We are in this together, if we stick together, we have a better chance of emerging, transformed yes, but emerging”.
THERE’S A LOT OF SPEAK AROUND THE SO-CALLED NEW NORMAL. HOW
HAS THE PANDEMIC CHANGED BUSINESS OPERATIONS AS WE KNOW IT?
IN OTHER WORDS, WHAT IS THE NEW NORMAL?
Flatter, more adaptable businesses that offer real value to customer wants and needs. Businesses that can pivot quickly and adapt to changing realities.
Businesses that display a combination of strong cash flow, but also embrace social responsibility. “We are entering the realm of more socially responsible capitalism…I suspect (hope!).”
A new model of cooperation between government and business, characterised by joint venture and improved cooperation between public and private sector.
ADVICE TO COMPANIES IN ADAPTING TO THIS NEW ENVIRONMENT?
- Courage and resolve – this too will pass
- Its ok to worry – just don’t panic and do nothing
- Be flexible and adaptable – chuck out your old playbook and embrace the new ‘normal‘. Look for
- opportunities they do exist!
- Protect your cash flow (as best you can) – cash is king at times like these
- The situation is likely to remain fluid and flexible for some time -embrace the chaos.
by Marc de Villiers | Mar 3, 2020 | Blog
Your Home is Your Castle
My recent ruminations on the state of the residential property market as discussed with Shaun Harris during April 2020.
I think realistically there is cause for optimism but the sector is transforming itself and more importantly… it’s going to be a very long and windy road back.
Enjoy!
CRACKS IN THE PROPERTY WALL
BUT THEY CAN BE REPAIRED
By Shaun Harris
21 April 2020
One day, the coronavirus will be gone. No one knows when. And if not completely gone, the rate of infections will have dropped dramatically and people will have stopped dying from the deadly Covid-19.
Many people know there will be an end, and are talking about what will emerge on the other side. Individuals, companies, even whole industries, are starting to plan for this. What will post Covid-19 look like when all gets back to normal, or what will doubtless be a new normal.
Like a wall protecting a market and the companies in it, the virus has cracked the wall around the property industry. It must be repaired, or it will start to crumble and eventually collapse. This is why planning for post Covid-19 is important.
Estienne de Klerk, chairperson of SA REIT and CEO of Growthpoint Properties, knows where the JSE-listed property companies are now and has ideas on where they might be going. “While South African REIT companies are not immune to the struggling economy, they offer less
volatility and their dividends are highly predictable and reliable with the potential for good medium to long-term capital appreciation.”
But now REITs, a few years back one of the top performing sectors on the JSE and now one of the worst, are not looking good. Share prices of some of the companies are down by more than 50%. Less than a month ago the market capitalization of the REIT sectors stood at R470.00bn. Now it is around R300.00bn. This is one reason why De Klerk on behalf of the industry has requested financial relief from National Treasury. For instance, REITs are required by law to pay 75% of their rental income in dividends. That’s the attraction for many investors to buy REITs.
But now some REITs are withholding interim dividend payments. Many tenants in centres they own are not paying rent. It’s also important, with the stock market in chaos, for the companies to maintain liquidity.
REITs are being severely affected by Covid-19. Andrew Wooler, Investec Property Fund chief, said with most of his fund’s portfolio in South Africa in the retail industry, management were having to deal with the crises every day, meeting with small and medium sized specialist retail tenants who had already been struggling because of the weak economy. “We are not sure when consumers will return to normal consumption.”
One positive view on REITs comes from analyst-at-large Ryk de Klerk. “Bloodletting and extreme volatility of stocks on the JSE-listed real estate sector caused huge panic and massive financial problems for pensioners, savers and retirement funds,” he writes in his weekly column Markets Wrap in The Mercury newspaper on April 14. He says the price fall of the JSE SA Listed Property Index over five years to end March was 66%, the worst fall in listed property on record. “The markets will at some stage begin to change focus on a more positive outlook post the unprecedented environment caused by Covid-19. At this stage I am comfortable to view
high-quality REITs with sound balance sheets as long-term annuity investments.” But he adds that, contrary to previous beliefs, REITs are not risk-free investments.
Not so upbeat on property shares is David Shapiro, deputy chairman of Sasfin Securities. “Invest in REITs? No, I don’t think so. I believe they still have to go through a lot of pain.”
On the stock market in general, he says he finds it difficult to find absolute winners. “Maybe gold shares. And some of the miners, if China starts to restock with iron ore.” He believes with such extreme volatility the market is going through a difficult period now. “But it will play itself out. We will fight back, make it up.
He says looking at the way forward for the property market is a difficult question. “I think recovery in the property market will take a long time. And it will be tough.
Vivian Warby, editor of Property 360, is more optimistic. “This is a time for cooperation – that mix between cooperation and competition – in order to help the property industry, transcend this new phase we find ourselves in. We have never had to think on our feet more than now, with a future that is so unpredictable and unclear. But this is an industry used to charting unpredictable and high waters. An industry known for its optimism and for bouncing back.”
Simon Stockley, property analyst and business entrepreneur, says this is cause for both concern and optimism. “Historically low interest rates and government intervention will provide a framework for a potential boom in the market post Covid-19.”
He adds that this is a watershed moment in history. “Many sectors of the economy are likely to be transformed as a result of Covid-19. For example, office accommodation is likely to shrink significantly in size with people hot desking and working more from home. Likewise, the hotel and leisure property sector is likely to face a prolonged period of recession as behavioral patterns adjust and social distancing becomes the norm post Covid-19.”
Russel Pearson, CEO of Re/Max Address, is also optimistic. Quoted by Bonny Fourie in Property 360, he says “homes are made of bricks and mortar in which you can live. You can’t live in stocks and shares where billions have been wiped off their values during the past month.” He adds the property market has remained very resilient in downturns and usually bounces back sooner than most people think.
“Yes, and astute buyers and those with access to capital can bargain shop, with distressed sellers looking to offload stock,” says Stockley. “The bottom line is your home remains your castle. Demand for residential property is likely to be the first sector to bounce back. But expect a bumpy road to recovery.”
Yet this resilience is not reflected in bond registrations at the Deeds Office. It shows a 5.6% drop in registrations from the beginning of the year to end March. And FNB’s latest Property Barometer indicated the lockdown is likely to have a dramatic effect on house sales volumes.
Those are the cracks in the wall. If not repaired, the walls around the property market will, just like Jericho, come tumbling down.
