There are 61 property companies listed on the Johannesburg Stock Exchange (JSE), according to Samkele Nkabinde, communications officer for marketing and corporate affairs at the JSE. However, while there are several property companies listed on the JSE, there are only two that focus purely on residential property. These are Indluplace Properties and Balwin Properties. But this is set to change, with the listing of Transcend, a derivative of International Housing Solutions that deals with the company’s residential properties portfolio.
Chantal Marx, investment analyst at FNB Securities, said: “There really is only one residential property pure-play and that is Indluplace. Balwin properties is also residential focused but they specialise in the development and sale of these properties. Octodec and SA Corporate have some residential exposure but are not regarded as ‘pure plays’. Transcend is a new property REIT coming to the market this year.”
What to consider when investing in property companies
Grant Meintjes, head of securities at PSG Wealth, explained that their investment universe is limited to stocks listed on the FTSE/JSE Capped Property Index, and none of the counters (investments) in this index are classified as residential real estate investment trusts (REITs).
However, Meintjes stated that when it comes to property companies, PSG Wealth prefers to hold counters with the following characteristics:
- Low price-to-book values.
- Low levels of debt/gearing and strong credit ratings.
- Utilisation of structures that offer superior liquidity like REITs.
- Superior distribution growth track records.
Marx added that distribution yield (the income you are paid by the company relative to the share price) and distribution growth are also key considerations. According to Marx, there are a number of intricacies around this, however, asset quality and geography also play a big role.
Property company versus property
The question is, whether it is better to invest in a property company, or to invest in the property itself. According to Meintjes, as these are completely different investment propositions, it is a complicated comparison.
Marx noted that it depends on the specific property of the property company. “Some of the advantages of investing in a property company is that your scale of investment can be a lot lower, it offers better liquidity, and you can invest in assets you would not have access to otherwise.”
The state of the property companies listed on the JSE
According to Marx, property is an important asset class in any balanced portfolio. There are a number of quality name companies listed on the JSE. “Most of these companies have recorded rental income in excess of inflation. Management teams have also been allocating more capital offshore which has turned out well. They are generally very good allocators of capital.”
However, Meintjes revealed that going forward, PSG Wealth anticipates seeing the effect of a lacklustre local economy starting to filter through reporting results, as sluggish demand for vacant space continues to put pressure on rentals.
“Regarding Brexit, our concerns mainly revolve around property companies with exposure to London office space. However, the full impact on UK property values remains uncertain. We remain of the view that the interest rate cycle will impact domestic economic strength, affordability and sentiment,” Meintjes added.
Marx noted that FNB is structurally positive on residential property in South Africa with urban medium price range supply still constrained. In addition, the sectional title residential property market is supported by growth in urbanisation, as well as a need for safety and convenience, and the cost-effectiveness of this property type when compared with stand-alone property.
Residential property companies listed on the JSE
Marx explained: “The residential pure plays are different in what they do. Indluplace rents out sectional title type properties for an income. Balwin is focused on the development and sale of residential property. Transcend will be similar to Indluplace but interestingly will focus on the R3000 to R7000 rental market – a very attractive space.”
