May was an extremely busy month in terms of company reporting and unfortunately, there was not much evidence to suggest that the sector has turned a corner. 

It was another tough month for South African REITs as geopolitical risks escalated following allegations by the US ambassador to South Africa that the country had provided arms and ammunition to Russia when the now infamous Russian cargo ship, the Lady R, docked at Simon’s Town naval base at the end of last year. The rand capitulated, almost touching R20 to the US dollar, while long bond yields spiked sharply higher. Against this backdrop, South African REITs fell on average by 7.9% in May, and are now down 11.6% in 2023. Among the heavyweights, Equites fell 17.6% after the company provided updated guidance for the financial year (FY) 2024 which was more than 20% below consensus estimates. The main reason for the large adjustment in guidance is that Equites will no longer include the impact of cross-currency interest rate swaps in their distributable income calculations. At the same time, the company announced it was looking to exit its UK joint venture with Newlands Developments during the 2024 financial year.

Redefine’s share price fell 14.5% after the company lowered guidance for FY2023 by around 10%. The revised guidance is hardly surprising given the substantial costs of loadshedding in South Africa and the steep increase in borrowing costs, particularly in Europe given the low base created there during the COVID pandemic. These themes, loadshedding and higher borrowing costs are likely to play out in the sector over the next 12 to 18 months and will result in little to no growth in distributable income for the next 2 years. There are obviously going to be exceptions to this generalisation; Octodec being a case in point. Octodec gained 2.0% during May after the company raised its interim dividend by 20% following a marked reduction in residential vacancies across its portfolio. Spear was also able to raise its interim dividend by more than 10% and as a result, the share price was down less than 1% despite the extremely weak backdrop for property companies in South Africa during May. Spear’s portfolio is invested exclusively in the Western Cape, where property fundamentals are improving at a faster pace than the rest of the country given the growth of the finance, insurance and business services sectors in the region, particularly in Cape Town.

May’s worst performer was Delta Property Fund after the company announced that the Chief Financial Officer (CFO), Marelise de Lange, had resigned to take up the vacant position of CFO at Accelerate Property Fund. Delta did also announce the proposed disposal of another property in Durban for a cash consideration of R46 million. The share price was down almost 30% during the month. Liberty Two Degrees was the top performer during May, with the share price gaining more than 5% after the company maintained guidance for the full year at their pre-close investor update. The company noted a steady improvement in both foot count and turnover across its retail portfolio, while hotel occupancies continued to move in the right direction.

May was an extremely busy month in terms of company reporting and unfortunately, there was not much evidence to suggest that the sector has turned a corner. The increased costs associated with loadshedding and higher borrowing costs will put a dampener on distributable income growth in the medium-term. That being said, the sector is on average trading at historically high discounts to net asset value, reflecting most of, if not all, of the headwinds property companies face today. Importantly, there are property types and geographic regions where those headwinds are less severe and where some tailwinds are now starting to emerge.