However, when one digs deeper into the performance of most of the assets underlying the companies and funds in the sector, they have been doing relatively well and continue to deliver on their promises to investors.
Reynolds contends that, while one cannot ignore the immensely challenging macro-economic backdrop against which companies in the listed property sector are currently operating, there are still opportunities to maintain some momentum and growth.
“Rising interest rates are pushing up the cost of borrowing and making it increasingly difficult for listed property participants to do more business, while concerns about the possibility of a downgrade of the SA economy to junk status by global rating agencies is certainly compounding the challenges facing the sector,” he explains.
The knock-on effect of these economic challenges has materialised primarily as share price deteriorations, making it difficult for undervalued companies to raise capital and is exerting downward pressure on their overall growth opportunities.
However, Reynolds points out that it’s not all doom and gloom for listed property. “Locally, the opportunity still exists for smart players to either acquire or develop quality assets at reasonable prices, or to embark in corporate activity in order to strengthen their positions.” He furthermore suggests prospects particularly for those companies that are willing and able, to diversify internationally.
“For a number of sector participants, expansion into Africa is presenting a real opportunity to maintain their all-important growth momentum. However, for those property companies that are unable to deal effectively with the vastly different economics and political risks of African countries, setting their sights on opportunities to diversify further afield could also be a good strategy.”
Reynolds offers a word of caution for listed property companies seeking prospects internationally though. “Successful global property diversification requires a wider view than just the property being targeted, and companies or funds considering offshore markets need to fully understand the economic fundamentals and drivers of the countries in which they are considering investing.”
He also emphasises that those looking to grow their portfolios internationally must cast their nets wider than just the obvious markets. “Areas like Central London and New York City, while obviously attractive for property investment, are so sought after that the prices have now become unattainable. Listed property players would therefore do well to shift their focus outside of these obvious areas of high attraction - and even higher prices - to regions where the opportunities for sustainable yields are now far more appealing.”
He cites the midlands of England as a prime example of such an area, given that it has experienced a fairly depressed market for some time, but which has now bottomed and is likely to start offering some good investment growth prospects in the near future. Another appealing region is Eastern Europe, where an educated middle class is driving demand for commercial properties, which are currently in very short supply.
On the subject of whether delisting is a viable option for struggling listed property entities, Reynolds says that this course of action may have some merit. “For listed entities that are already highly geared and are struggling to raise capital, delisting may be a viable approach. However, this will only be the case if such delisting presents a real opportunity for the business to attract a strong backer and achieve better gearing.
“Stagnation is not an option, and it is vital that participants in the sector quickly develop strategies that allow them to achieve some growth going forward. That’s the only way the sector will successfully weather the current economic storms and still enjoy its historical position of market strength when the SA economy gets back on a solid footing,” he concludes.
