The markets in which we operate
Investing in South Africa
The JSE-listed property sector in South Africa remains healthy, with over 40 companies managing assets exceeding R486 billion. During the year, property indices were revised to reflect structural changes to the sector. The SA REIT index now has 24 constituents, with a market capitalisation of over R380 billion. Over the past 10 years to June 2017 the REIT sector has generated better total returns than all the other asset classes on the JSE.
Averaged total returns of the local REIT sector deteriorated in the first half of the 2017 calendar year partly in response to negative news in the retail sector that included the Stuttafords group being placed under business rescue. Weaker trading conditions in the retail sector were exacerbated by political and economic developments in South Africa, detailed below.
The attractiveness of property as a high-yielding asset class remains intact, as evident in the R11 billion in fresh capital raised by the listed sector through rights offers and private placements over the six-month period to June 2017. Most of the capital invested in the sector has been focused on offshore property counters, suggesting that investors are becoming increasingly cautious about the outlook for the local economy.
South Africa's macro-economic environment is cause for concern. GDP growth has slowed markedly in recent years, reaching a low of just 0,3% in 2016, with only a moderate rebound expected this year. With unemployment at an historical high of almost 28% and rising inflation, particularly for food, consumer spending is under severe pressure. Reserve Bank figures show that real household spending rose just 0,8% in 2016, but has dropped steadily in the first half of 2017. In addition, SA household debt levels remain very high, at well over 70% of income.
By the second quarter of calendar 2017, the country was in recession for the first time since 2008. It was also dealing with unprecedented levels of political uncertainty after President Zuma changed his cabinet and removed the highly respected Pravin Gordhan as finance minister, a move that precipitated a downgrade of South Africa's investment-grade status by two ratings companies for the first time in 17 years (and later, a third downgrade). Economists agree that, in view of the volatile socio-political outlook and weaker-than-expected macro-economy, trading conditions are expected to be more challenging for the rest of the year.
More positively, and despite a poor performance in the first quarter, the domestic retail sector rose 2,9% year on year in June 2017, according to Statistics South Africa. While overall spending is a driver of the economy, depressed consumer confidence is expected to keep retailing, in particular, constrained.
Consecutive years of poor economic growth and retail space expansion in South Africa are now evident with pressure on leasing and renewal rates, as well as the overall performance of shopping centres. This is likely to translate into a lower distribution growth trend across the property sector.
Although property is a long-term asset class, the short-term focus of the investor community puts pressure on REITs to produce near-term dividend growth. To meet investors' demands, many SA REITs have increased their exposure to overseas assets, with some 46% of total assets now based offshore due to limited domestic opportunities and relatively low European funding rates.
Although the South African property market is mature in terms of available and attractive investments, rapid population growth, increasing urbanisation and a growing middle class continue to stimulate demand for retail space. The country retains its prominent mall culture, where quality shopping centres in a good location, with an attractive tenant mix and well-kept facilities perform well. Retailers are currently choosing to invest more in their flagship stores in existing high quality malls, as opposed to aggressively rolling out new stores in other malls.
Investing outside south Africa
There has been a marked increase in investment activity by South African property funds in central and eastern European markets, particularly in the retail sector. Hyprop has a 60% interest in three South-Eastern European malls in Macedonia, Serbia and Montenegro and has reached agreement to acquire a 60% interest in The Mall, Sofia, Bulgaria, post year-end. These countries are recording strong economic growth that, together with lower taxes, translates into a better return on investment.
We will grow this portfolio to the extent that further opportunities become available at prices that meet our investment criteria.
Sub-Saharan Africa (excluding SA)
Hyprop believes that this region offers long-term opportunities. In line with our strategy, we are focused on owning shopping centres in large African cities, with high population densities and disposable income. We are currently invested in six shopping centres in sub-Saharan Africa: Ghana (4), Zambia (1) and Nigeria (1).
Recent years have been more difficult for the region, especially for countries that depend on oil as a revenue stream. Lower oil prices and slowing Chinese growth have culminated in the region recording its lowest growth in 20 years.
Although the key cities where Hyprop is invested continue to record economic growth – supported by rising urbanisation, population growth and industrialisation – we do not currently plan to expand our African exposure.
Supporting data for this market overview has been drawn from analysts’ reports, StatsSA, the South African Reserve Bank and others.