18 Oct
Newsletter

October 2019 Newsletter

Performance

The month of October typically showed the volatility that has come to characterise global markets with President Trump of the U.S. re-evaluating the possibility of a trade deal. Nonetheless, he announced that a ‘phase one’ portion of the trade war resolution would occur. Global markets in turn returned the favour as we saw global markets run up. To add to the relief, American companies that have been announcing results have been beating expectations, much to the fanfare of the market with 78% of all companies reporting beating estimates. Even though the Federal Reserve decided to hold rates, the market went ahead with a ‘risk-on’ rally. The portfolio for the month of October was up by 2.83% and beat the South African Listed Property index at 1.80% and the All Property index at 2.80%.

Gold rallied well into the month and oil came off its highs caused by the bombing of the Saudi Arabian oil fields. Saudi Arabia continued with its intentions of listing Aramco, the Saudi state oil company whom the crown prince at one point valued it at $1.5 to $2 trillion, making it one the biggest listings on global markets, ever. Even though as we feel that Saudi Arabia has come late to the party in trying to diversify away from crude oil as an economy (such as United Arab Emirates and Norway), it’s never too late. African countries have yet to begin the process as future estimates of oil don’t see the price going back above $100’per barrel, which will impact their economies.

 

Going back to the West, Britain provided more certainty with parliament approving the Brexit deal that Prime Minister Boris Johnson presented and going ahead with the general election, set to happen on December 12, 2019. The European Union also approved the further delay of Brexit, allowing for general elections. The Pound strengthened against all currencies by approximately 2 %, which sent UK Listed property companies higher. More importantly, we believe that Brexit may provide an opportunity for foreign investors to buy great assets in a great location at cheap valuations due to the uncertainty of Brexit. As investors, for us to achieve greater returns, we as MSM Property Fund had decided to change the benchmark so as to allow for larger allocation to offshore companies. This will allow for further diversification for the portfolio across global markets.

Benchmark Change (Click here)

The changing of the benchmark for our unit trust is important in that it gives the portfolio the ability to seek returns in other geographies outside of South Africa. We still believe in the investment case for South Africa yet we believe the turnaround of the economy will take longer. Hence, we would want the ability to have access to other regions where growth is more prevalent. Also, following the collapse of the listed property sector in 2018, driven by the Resilient Stable of companies which at the time constituted 40% of the South African Listed Property Index, this revealed the concentration risk of a handful of companies on the performance of the index thereby not being an accurate and representative index of the sector. Therefore, the change to the All Property Index was instituted. The letter written to clients goes deeper into the explanation regarding the decision made.

 

The Collapse of WeWork Listing
In August, we reported on the rise of WeWork, a nearly $47bn valued company on the verge of listing that was seen as a rising unicorn company that seemed destined for success which would redefine the experience of everyday work and commercial real estate. But as more information became apparent due to listing requirements destined for the month of October, more corporate governance issues were raised by the potential investors and more scandals came out regarding the behaviors of the then CEO Adam Neumann. The outcry eventually led to the resignation of the Adam Neumann as CEO, the suspending of the listing and the saving o the company as it had been burning through cash due to the high intensity of development. The meteoric rise of WeWork has come to characterize the tech boom of our era. But what has changed from the previous period is societies appetite regarding how a company and its leadership conduct themselves, specifically in this case, corporate governance.

18 Sep
Newsletter

September 2019 Newsletter

Performance

November saw volatility come back as the markets began to doubt whether the ‘phase one’ deal of the trade war between the U.S. and China would be completed. America’s economy continued to release good economic data with 76% of the S&P500 companies beating revenue expectations in their quarterly results. An example of this was Apple and Microsoft releasing good earnings which beat estimates. U.S. homes sales beat expectations and U.S. job data growth came in strong, overshadowing the trending negative manufacturing numbers caused by the trade wars. Global stocks took a breather from rallying as investors took stock of how far developed markets equities (supported by central banks easing) had run and being somewhat nervous about the next leg up for global risk assets. This culminated in profit taking and shifting of focus to emerging market currencies as the glut of funds in the system began to look for yield, with the South African Rand being one of the biggest recipients of ‘hot money’ due to our relatively high interest rates vs developed markets such as Europe and the U.S. These factors saw us losing -0.97% performance on the portfolio. But we used the opportunity to position the portfolio more towards the U.K.

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As the Brexit saga continued, the negative effects have continued with British data showing a slowdown in business confidence. Even after the highly anticipated debate between Boris Johnson and Jeremy Corbyn seemed to iron out key issues, the lack of a clear winner added onto the malaise. Even with the economy having seen the slowest growth in a decade, the U.K. economy was able to dodge a recession. With mainland Europe, the slowdown in German manufacturing continued, mainly caused by trade wars. However, investors maintained their optimism with Eurozone as European company earnings for the third quarter came out better than expected.

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South Africa continued to be dogged by negative economic news. This reached climax with the downgrade by Moody’s from stable to negative, citing lack of economic growth and reforms critical for the rejuvenation of the economy. The historic Rugby World Cup win by South Africa (seeing Siya Kolisi being the first black man to lift the cup as captain) lessened the blow as it brought much needed positive news. The Johannesburg Stock Exchange noted that due to the anticipated downgrade to junk status by March 2020, they had seen approximately R90bn outflow. This theme was re-iterated at the investment conference held in Sandton where President Cyril Ramaphosa was able to raise a further R371bn against a failing economy where business confidence dropped to 91.7, a fall of 2.4% year-on-year for the month of October. More data was released noting the number of consumers having impaired credit rising to 40.8% in the second quarter. This was evident when Truworths and The Foschini Group released poor earnings, citing weak consumer numbers.  That being said, Black Friday saw sales across all retails rise approximately by 14% compared to last year. The Rand strengthen past R15 to the U.S. Dollar as optimism came in for the currency.

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Property

Locally, several companies released results for the last 6 months. Rebosis saw the company not pay a final dividend as they dealt with re-organising the portfolio and decreasing the heavy debt burden. The company has also been selling off properties and engaging in a possible merger with another listed property company, Delta. Octodec saw their dividend drop by 1.2% as their residential portfolio took a hit citing the economy as consumers took on less residential stock. Investec Property Fund increased their dividend by 3.1% and noted that their South African portfolio was subdued. They mainly saw better results in Australia and have also been buying assets in the Eurozone. On the offshore side of the portfolio, Capital & Counties along with Intu and Hammerson (U.K. focussed property stocks) have been selling off properties so as to decrease their debt burden. Sirius, the German specialist, released very good results as the business model yielded good results by increasing the dividend by 8.6%. Self-Storage increased their exposure to U.K. by acquiring more properties. What is of importance is the UK elections for parliament which will hopefully bring more certainty to the UK environment. Growthpoint also looked to take advantage of the low valuations of Capital & Regional Plc., by buying out the business, which shareholders approved. The shift to UK stocks reaffirms the cheap valuations and our overweight stance in U.K. companies.

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18 Jul
Newsletter

July 2019 Newsletter

Performance

The month of July ushered in the second half of the year which saw the continuation of the American economy powering ahead with gross domestic numbers (GDP) coming in at 2.1% beating expectations of 1.8%. 78% of the S&P500 companies that reported second quarterly earnings beat expectations with 60% beating revenue estimates. The strength of the American economy provided safety for many investors as the American Dollar appreciated and hit its highest level against the Japanese Yen. The friction between President Trump and the Federal Reserve also continued as the Fed was essentially pressured into cutting rates because of global growth estimates being lowered. President Trump immediately placed more tariffs on China, signalling that the Fed didn’t cut hard enough with 25bps instead of 50bps. The spectacle that is playing out regarding tariffs is very important because it essentially determines global growth which then affects the global growth prospects of South Africa as well.

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As a means of trying to stop the pain felt by the South African consumer (acting as a stimulus effect), the Reserve Bank governor of South Africa also cut rates. We believe he did this due to political pressure from the ongoing impasse and debate within the ANC regarding independence of the Reserve Bank.  The cut in rates goes against what the governor has been saying for several months as this lessens the buffer against global events such as the trade wars and hence if there are any shocks, the Rand would weaken further. This would be passed onto the South African consumer in the form of petrol price increases and more. And that’s exactly what happened, as trade wars continued, the Rand weakened breaking the R15 level as the U.S Dollar.  Boris Johnson became the Prime Minister of the United Kingdom and this added to uncertainty as Boris has been known to be open to a no-deal Brexit from the European union. This possibility could have disastrous economic consequences for the Eurozone and the world, along with all of the trading partners such as South Africa. For South Africa, the seemingly infighting within the ANC party and the slow pace of resolving of key issues has dampened investors confidence on the resolution of problems such as Eskom and the turning around of unemployment (which increased to 28%).

Property

However, in the midst of apparent darkness, we saw the offshore component of the portfolio save the performance due to the hedging effect against Rand weakness. On looking at the TOP 40 Holdings of the portfolio, we had 40% offshore exposure, which is illustrated by the table below. The biggest contributors to performance were the continental European companies. The UK exposed companies weighed down the performance as the market considered a no-deal Brexit.

Offshore Weighting

Portfolio Weigting

Weighted Average

GRT

27.7%

 15.65%

 4.22%

NRP

100%

 10.89%

 10.89%

RDF

20.7%

 9.98%

 2.06%

FFB

42.2%

 6.91%

 2.92%

VKE

49%

 6.72%

 3.29%

HYP

28.4%

 5.90%

 1.68%

SRE

100%

 5.47%

 5.45%

EPP

100%

 5.11%

 5.11%

EQU

32%

 3.74%

 1.196%

STP

100%

 3.31%

 3.31%

Total

40,13%

Table 1: Weighted offshore average for Top 10 Holdings

The rest of the portfolio was determined by South African dynamics, seeing a continuation of retail vacancies sitting at 4%, industrial sitting at 3% and offices still being the worst performer at 12%. The poor performance has prompted consolidation and disposals within the listed property sector. Hyprop (the owner of Rosebank Mall) and Attacq (the owner of Mall of Africa) disposed of their African assets to settle their U.S debt. Emira and Dipula tried to buy out SA Corporate, but both bowed out as the competition for the company intensified. Delta and Rebosis announced a possible merger between the two companies. Hopefully this time round, they can complete it.

Like offshore markets, South Africa has had a proliferation of shared office spaces geared towards start-ups and freelance workers. Typically, Regus was the name that was associated with the shared office industry in South Africa but of late, several competitors have arrived such as Flexible Workspace and Workshop 17. What has been of interest is the arrival of WeWork, an American based company which started out in New York in 2011. It is now valued at $47bn, having 528 locations around the world, and is set to list in the coming months becoming possibly the second biggest IPO of 2019. There are concerns regarding the loss that was made of $1.9bn for 2018 and corporate governance issues related to management. The company recently opened up in Rosebank, being a tenant of Redefine, and is set to open up in Sandton along with Cape Town.

18 Apr
Newsletter

April 2019 Newsletter

Performance

For the month of April, performance was up by 2.3% closing out the first quarter of the year. Cumulatively, that brought returns of 2% for the quarter as globally, stocks saw their best returns in the last nine years. The quarter had started on a more positive return (7.3% for the month of January) as a recovery from the difficult last months of 2018 saw fund managers picking up equities at cheap valuations. The main drivers of the returns were the possible resolution of trade wars between the U.S. and China, the U.S federal Reserve halting back the increase of interest rates for the year with the South African Reserve bank and other global central banks following in suit. In addition, China’s economic recovery continued due to stimulus placed which yielded results where manufacturing managers increased their purchases along with consumer confidence increasing in the world’s second largest economy. Detractors of performance for the quarter were factors such as Brexit, where Theresa May postponed the conclusion of Brexit due to the impasse of her and the British parliament whom subsequently rejected her deals. Local factors were the most evident as rolling Eskom blackouts hampered confidence in the economy and the consumer had to bear petrol price increases and the weakening of the Rand, which was subject to local and international factors such as Turkey. Also, we saw the IMF and Reserve bank downgrade economic growth for South Africa.

Property

In terms of property, the offshore Eurozone portfolio continued to perform well as industrial property was the recipient of structural changes in the patterns of shopping by consumer. This was followed by offices and then retail. Both industrial and office portfolios saw rental growth whilst retail began to see negative growth in rentals. For Britain, it bore the most pain in terms of retail as the transformation of retail from main street to digital occurred. Germany, mainly Frankfurt, was the biggest recipient of companies moving away from London due to the Brexit saga as companies prepared for the worst-case scenario.

Back in South Africa, like offshore, the best performing sector was industrial property, followed by retail and finally office.For the quarter, industrial property saw rental growth of 4.6% with a vacancy rate of 3.6% (the lowest) as demand for large industrial properties continued to outstrip supply. The industrial space saw an improvement in the growing manufacturing, a sign of the growth-shoots expected as the new president returned manager confidence.

The overall retail vacancy sat at 4.2% coming down from 5.9% in 2018 as the sector saw an improvement in the footfall of certain centres. The Super regional malls such as Mall of Africa, in Waterfall City, and community centres where the best performing formats of property due to convenience and pricing for clients (depicted in the table below). Also, we saw an improvement in consumer confidence.


Source: SAPOA

The worst performing sector was the office sector with an average 11.2% vacancy rate. Due to excess stock and the lack of backfill from emerging companies, the high vacancy remained undeterred with City of Cape Town having the lowest rate at 7.7% and eThekwini having the highest at 13.5%. Special mention goes to Sandton CBD, commonly known as “the richest square mile in Africa” which sits on vacancy rates of 17.6% due to development outstripping demand and tenant consolidations resulting in rental growth remaining negative.

Looking forward, the month of May will be a busy many property companies releasing results and South Africa going to voting booths.

18 Mar
Newsletter

March 2019 Newsletter

Growthpoint, the largest South African listed property company with a market cap of R72bn, released results during the month of March which were indicative of the difficult economic environment. Dividend per share growth was up 4.5% for the six months ended December 2018 and the net property income growth was at 1.1%. This was largely pulled down by the poor performance of the office portfolio which saw vacancies increase from 8.6% to 10.2%, which is still below the national average of the office sector at 11.2% (according to SAPOA). Management have strategically shifted their focus to offshore, particularly Poland and Eastern Europe, where growth is still occurring above 5% due to good economic fundamentals for the region.

Interestingly, the retail sector nationally, has seen an improvement in vacancies which now sit at 4.2% coming down from 5.9% in 2017. This was a response to the 4% increase in sales growth and 5.3% increase spend per head. This may be the beginnings of growth-shoots but its still too early to call a recovery, especially when national elections are around the corner. Globally, markets remained volatile as Theresa May battled to get her deal across the British parliament for Brexit and U.S markets were concerned about a possible recession on the back on an inverted yield curve, typically known for predicting a recession. South Africa’s Reserve Bank kept interest rates flat, joining global central banks as they held back on increasing rates due to slowing growth. All of these factors added to the negative performance for the month where we took some profits so as to protect the portfolio.