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SIMON BROWN: I’m chatting with Ian Anderson, portfolio manager at Merchant West Investments and compiler of the SA Reit Chart Book. Ian, appreciate the time. Another good month for Reits in June – 4.2%. That actually now puts them ahead of both equities and I think bonds as well year to date at the halfway stage.
IAN ANDERSON: That’s correct. And in the context of what was happening during the month of June I think it was a fantastic outcome for Reits in South Africa. The equity market was under quite a bit of pressure.
A lot of that had to do with falling metals prices; but a negative return from the equity market and a very strong positive return from Reits – always a good thing for the property sector.
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SIMON BROWN: And what we have seen is an acceleration in the 12-month distribution growth. That’s now 10.5% and some change. That is a chunky number. I’ve spoken about this a bunch. That’s a good number.
IAN ANDERSON: Absolutely. And I think that’s what’s driving the returns that we’re seeing this year. Most people probably expected the sector to take a bit of a breather after very good runs in 2024 and 2025, but this continued improvement in property fundamentals, which is now manifesting itself in this inflation-beating dividend growth, is attracting more and more investor attention.
So fundamentals are strong. Yes, I think the market got a little wobbly in prior months around rate hikes and the potential for interest rates to move in the wrong direction for Reits.
But again, the numbers that the listed property companies are producing are justifying some of the price action that we’ve seen.
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SIMON BROWN: I want to touch on rates for a moment. I mean, two things have happened this year. One is we’ve seen prime up, rather than the expected down. And of course we had the 10-year yield on government bonds spike with the invasion in Iran. They’ve come back a whole lot.
Which is the market more concerned about? Is it the 10-year yield that is sort of the benchmark for the sector?
IAN ANDERSON: Absolutely. There are a couple of reasons why interest rates are important. Obviously it’s a competing asset class. A lot of people look at property and bonds and go, okay, which one offers the most upside from current prices?
If bond yields are falling it does mean that property becomes a little more attractive, and so people invest in property – and then the property yields fall as a result of that.
But it’s also the rate that they use to derive their cost of borrowing. So when these guys go and borrow money – when the management teams go out there and borrow money – they tend to fix it for three years or five years or seven years, and those fixed prices are priced off the yield curve.
So a reduction in bond yields means a reduction in borrowing costs for Reits and therefore higher profits in the future.
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SIMON BROWN: I’ve just zoomed out to what, a five-year of the 10-year, a five-year view of the 10-year, and we’re just off the lows which we got earlier this year. Of course the Iranian invasion changed that.
But let’s go back to markets. We had a lot of results coming through as well, mostly good numbers and mostly guiding to high single-digit and in some cases low double-digit growth into next year. I’ve talked to it a lot – we’ve seen a lot of rerating. But that’s based back onto good fundamentals.
IAN ANDERSON: Yes, absolutely. You know a lot of companies have junior rents Reits. And so it wasn’t necessarily the actual results themselves. But they were pre-close announcements, an updated market. And by and large the companies either reaffirmed their guidance, or they actually increased their guidance, and that guidance was already quite aggressive, especially when you compare it to what happened in 2002, 2003 and even 2004.
So we’ve now had five consecutive quarters of dividend growth – and this is the highest level that we’ve had in quite a long time.
So 10.5% is already in the base and most of the management teams are expecting a similar level of growth – if you aggregate all of them –over the next 12 months. So that was very positive for the sector as a whole.
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SIMON BROWN: We also saw some sort of moves offshore by Hyprop. Vukile is going into Italy, which is new because of course they’ve been in Spain forever and a day. It’s all Europe. I’m never sure – Italy, Spain, to me here in Joburg it’s all the same. I’m sure there are nuances, but certainly [Vukile’s] Laurence Rapp and his team have managed their European expansion incredibly well.
IAN ANDERSON: Yes, they have, and I think that’s the important thing. You raise capital – and they’ve raised a lot of capital. But the reason they’re able to raise that capital is because of their track record of deploying that capital sensibly.
I still think the jury’s out on [Vukile’s] Italian expansion. It’s not a very big investment in the greater scheme of things, but it is a move into a market where they haven’t participated before. They have an operating platform in Europe which allows them to get market intelligence, and that market intelligence is obviously telling them that it’s an opportune time to go into Italy. And they’ve made that call.
They did the same thing when they went into Spain and then later into Portugal, and it worked very well for them. But again, this is a different market to Spain. It’s a different market to Portugal. The jury is still out.
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SIMON BROWN: I take your point.
A quick last question, I was doing my month-end scan and almost top of the pops was Delta Property Fund, up at almost 50%. I suspect this is maybe more technical than fundamental in terms of a move of that size.
IAN ANDERSON: Absolutely. I do think that the market is reacting a little more positively to some of the stuff that’s coming out of Delta. They’re obviously still struggling. They haven’t been able to pay a dividend yet. But importantly they are now starting to generate profits. There may come a time when they can start paying dividends again.
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And I do think that there are some investors who are looking at an opportunity, a speculative opportunity, to make some money here. If you bought them [Delta] a month ago, you’ve already made 50%. But I think this is more speculation. Potentially there is somebody that’s out there who thinks it’s an opportunity to take the company out.
SIMON BROWN: I hadn’t thought of that. Certainly speculative, make no mistake. But I hadn’t thought of a potential delisting.
We’ll leave it there. Ian Anderson, portfolio manager at Merchant West Investments, always appreciate the time.
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