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Offshore exposure may cushion SA-listed property if the rand drops

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The global sell-off in emerging markets, an intractably weak domestic economy, an oversupply of business space, and a focus on the quality of earnings are all set to be major drivers of the SA REIT sector in the second half of 2018.

International investment remains a compelling opportunity for the sector. More than 50% of SA-listed property is exposed to offshore markets and this, believes Catalyst Fund manager director and portfolio managerm Zayd Sulaiman, will provide some cushion should the rand depreciate even further.

“Currency depreciation expectations should result in more demand for offshore property. This could lead to further inward listings on the JSE of offshore-focused platforms, especially those with a proven track record,” says head of research and property at Anchor Stockbrokers, Craig Smith.

Micro issues within the SA REIT sector which derailed its overall performance in the first half of the year are expected to have less impact on the listed property sector’s rebased second-half showing, which is likely to be driven by a combination of domestic and international macro developments.

Bandile Zondo, research analyst for real estate at SBG Securities, says global monetary policy shifts in developed markets have sparked a broad sell-off in emerging markets.

“Developed market central banks are rapidly pulling back post-crisis stimulus leading to a broad acceleration in yields, which has had a negative impact on sector returns.”

Sulaiman points out that global political and economic events – ranging from trade wars and tapering EU stimulus to Italy’s debt worries and others – in a rising foreign interest rate environment don’t bode well for emerging markets in the short term.

In addition, weak domestic macro variables persist. “After the euphoria of the ANC elective conference in December, reality has set in and it has become clear that any economic recovery will take time.

“We need decent GDP growth to stimulate demand for space and reduce vacancies. This is taking longer than expected,” says Sulaiman.
Zondo says: “In South Africa, the market has arguably discounted a weaker economic growth trajectory since the recent disappointing first-quarter GDP print. That said, it is clear that near-term news flow will continue to fuel concerns around the trajectory of any economic recovery and keep any optimism about 2019 at bay. While we remain constructive around an expected 2019 recovery based on the consumer recovering, assisted by credit, we would arguably need to see a marked improvement in business confidence near-term.”

Sulaiman reports that recent sector company results show that local property fundamentals remain weak and companies have to focus on tenant retention.

Smith believes fundamentals in the property sector should improve following a decrease in speculative development. “The pace of this improvement will be gradual and will largely depend on local GDP growth.” Sulaiman says the over-supply of space, especially in the office sector, and lack of demand is a particular pressure point.

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