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.