Not all dark for listed property

Staff Reporter

29 MAR 2008, 09:46

3 min read

Power failures may have darkened the prospects of some tenants, but there may be some light ahead for listed property investors, says asset manager Stanlib.

This relates to new construction supply constraints, ensuring continued high demand for existing space. At the same time, investors have begun to see that things are not universally black for all tenant categories in the load-shedding era.

Evan Jankelowitz, co-head of Stanlib’s property franchise, points out: “Listed property has been subject to increased volatility, especially during January’s load-shedding.

“Nervousness was caused by a spike in the long bond rate, creating a gap between bond and listed property yields, plus concerns about rental streams if load-shedding caused some business closures or prompted some tenants to delay expansion plans.

“Sober reflection since then has alerted listed property investors to a range of factors that contribute to property-sector resilience. Volatility may continue, which means listed property supporters who take a longer view could exploit value opportunities.”

Listed property supporters are attracted to the sector as long-term equity growth can be a hedge against inflation while rental streams provide steady income. Factors that affect vacancy rates are therefore cause for concern.

Says Jankelowitz: “Power-supply uncertainty is obviously bad for business. Therefore, early reaction to power outages at shopping centres and offices was negative, but we can already see the sector’s ability to bounce back and many investors now take a more balanced view.”

Key factors include:

“Mom-and-pop” vulnerability: Small retailers don’t usually have generators. Lost power means lost business. Some might close — adding to retail vacancies.

Restaurant sensitivity: In a 25-day working week, restaurateurs often work up to 20 days to reach break-even. If they are powerless for five days a month, profit is wiped out. Spoilage from freezers adds to costs. If restaurants close, vacancies rise.

Strong anchors: Large retailers usually install their own generators. These anchor tenants are little affected by power failures.

Solution-led management: Property-company executives have been quick to install additional generators. This creates an extra monthly cost per square metre, but small retailers can usually afford it being a small percentage of total rental, staying operational while maintaining listed property group earnings.

Resilient mix: Major corporate groups (blue-chip tenants) often have their own generators in the office category, while in the industrial segment there is a relatively low weighting of manufacturers who might be hard hit by power cuts. Warehousing and distribution account for a big sub-segment of this market and are not as vulnerable.

Bottleneck upside: Any delays in Eskom approvals for new developments will add to costs, but a slower developmental pipeline will assure strong demand for existing space and sustain rental levels.

Notes Jankelowitz: “Ultimately, sensitivity to Eskom will become another variable for share analysts to assess. It focuses attention on a listed property group’s tenant mix and exposure to the office, retail and industrial segments.

“A group’s local area dominance, with its built-in protection of the rental stream, will be critical. But Eskom’s capacity crisis doesn’t pull the plug on property as an investment option. Even if GDP growth falls from 5% to nearer to 4%, long-term prospects will hardly be plunged into darkness.”