Cracks appearing in real estate dividend payouts

It’s becoming difficult for JSE-listed real estate stocks to achieve sustainable inflation-beating dividend growth, with industry players increasingly warning that the sector has entered a declining dividend growth cycle.

Over the past four years, investors have been rewarded with dividend growth of between 7% to 10% by real estate stocks – making the sector one of the progressive dividend payers on the JSE. Dividend payouts are one of the key metrics investors typically use to judge the investment case of real estate companies.

If recent real estate company results are anything go by, it appears that slow dividend payouts are the new normal.

The latest indication of this emerged from Tower Property Fund’s results for the year to May 31 2016, with the company’s dividend growth declining by 16% compared with the previous year.

The lower dividend was attributed to Tower’s decision to no longer distribute once-off profits to shareholders and uncertainty about rental payments by its tenant, Konzum, Croatia’s largest supermarket chain. Tower expanded its property portfolio in Croatia by acquiring four shopping malls for €66.4 million (about R1 billion) in 2016.

Tower is not the only real estate company feeling the pinch.

Emira Property Fund has already warned the market that it expects a negative growth of 2% in dividend payouts for the year to June 30 2017.  Sector heavyweight Growthpoint Properties recently declared an interim dividend growth of 6.1%. The last time Growthpoint posted a dividend growth of this kind was in 2011.

Liberty Two Degrees and Hyprop Investments would also declare lower dividend growth due to the recent closure of Stuttafords stores at some of their shopping malls. Read more here: Liberty Two Degrees and Hyprop count costs of Stuttafords’ demise.

See below dividends declared by other companies

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Bridge Fund Managers’ expects slower dividend growth to continue in 2017 and 2018, said the chief investment officer Ian Anderson.Market watchers said the worrying state of the SA economy and the exclusion of once-off profits in dividend payouts such as development fees or capital reserves (which could artificially boost dividend payments), are the reasons behind lower dividend payouts. “We are finding that SA property fundamentals are under duress with certain sub-sectors, specifically office and retail, having difficulty attracting competitive rentals in lieu of increasing vacancies and negative rental reversions,” said Anas Madhi, a director at Meago Asset Managers.

“While growth will slow from the double-digit rates we’ve become accustomed to over the past three to four years, it should still exceed inflation over the next two to three years,” he said.

Another reason for the slow dividend growth is the sector’s growing exposure to offshore markets. Over the past two years, SA-focused real estate companies have aggressively concluded international deals and no fewer than 12 offshore companies have listed on the JSE.

Figures from Bridge Fund Managers indicate the SA Listed Property Index, which makes up the JSE’s 20 largest real estate stocks, is more than 40% exposed to offshore markets.

The big drawcard to offshore markets by SA-focused companies has been low-interest rates (on average 3%) and higher yields on properties (more than 7%) – known as a positive carry – which boosts dividend payouts to investors in year one.

Paul Duncan, the investment manager at Catalyst Fund Managers, said that now that the rand is showing relative strength to the US dollar, several property companies with offshore earnings might be hit hard.

“It [the strength of rand] is going to start having a negative impact off the high base previously seen in property company earnings. The real estate income growth that drives dividend growth is under pressure. This is reflective in the performance of share prices as investors are anticipating negative earnings surprises,” Duncan said.

“We don’t believe some real estate companies have the expertise to move into offshore markets. They need to understand the markets they operate in.”

Investors need to be discerning regarding the investment case of real estate companies, said Madhi. “Investors also need to look at the source and quality of distributable earnings and find comfort on its sustainability in a very tricky investment environment.”

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