The Bullring shopping centre, operated by Hammerson. Overall, Hammerson, Shaftesbury Capital and Nepi Rockcastle look poised to reverse 2024’s underperformance relative to their SA counterparts in the year ahead. Photographer: Bloomberg
By Kanyane Matlou
Looking at South Africa’s macro outlook, consensus expectations are for GDP growth to come in between 1.5% and 2.0%. This would be a respectable improvement from the circa 1% growth the country has experienced over the past decade, being driven by improving confidence in the wake of a broad-based coalition government (fundamental policy differences amongst the major parties aside).
As a result, optimistic expectations for businesses tied to the domestic economy appear reasonable, and most domestic assets have rerated meaningfully from what had been undemanding levels. South African listed property has been one of the major beneficiaries of this turn in sentiment.
SA economic prospects compare favourably to Europe’s
Juxtaposing SA’s growth expectations with those of advanced economies, where some JSE-listed property companies generate all their earnings (such as the Euro area and the UK), SA’s prospects at the macro level do indeed look appealing. Bloomberg consensus estimates for GDP growth in the UK and the Euro area are 1.1% and 0.9% for 2025, respectively. One would be forgiven for thinking that at a high level, this implies better return prospects for SA-centric companies than those with exposure in these jurisdictions. But such a view would be missing several nuances.
The importance of valuations and a bottom-up view
Firstly, starting valuations matter. SA-centric stocks have broadly baked in this improved macro outlook, meaning that the expected growth outcomes would need to outperform expectations for a further rerating from current levels. Secondly, looking at the offshore prospects purely at the macro level does not tell the whole story. The quality of underlying assets owned by different businesses can vary considerably within a single country, which could see a substantial divergence in prime assets’ operational performance even against a challenging macro backdrop. Recent company results from some European and UK landlords reflected good operational performance, which can only be characterised as stellar in the context of economic strain.
Aggregate measures can hide marked divergence
Thirdly, even if the macro picture was a proxy for the operational prospects, what gets missed in aggregates is the variance at the disaggregated level. For example, while the Euro area aggregate shows muted growth expectations, some member countries, such as Spain and Portugal are expected to fare meaningfully better than the likes of France and Germany. And within the broader European continent, including emerging countries to the East, growth prospects are even more compelling than in the core of Europe.
An encouraging global property reporting season
Considering the above and looking at the read through from some global bellwethers to fully offshore-focused property counters available on the JSE, there is strong potential for some to outperform their SA counterparts. Operational performance metrics released by pan-European retail landlord, Unibail-Rodamco-Westfield, in recent weeks showed solid core rental growth of 8.9% for 2024 in its UK portfolio, as well as impressive direct asset valuation growth of 4.9% after more than five years of write-downs.
A positive read through to the JSE-listed offshore property counters
Given broadly equivalent asset quality, UK retail landlords Hammerson and Shaftesbury Capital are likely to deliver similarly robust metrics when they report results in coming days. Another large European retail landlord, Klepierre, delivered encouraging results which again showed solid fundamentals across key regions. This is a positive read through for one of the largest retail landlords in Central and Eastern Europe (CEE), Nepi Rockcastle, from an earnings as well as Net Asset Value (NAV) growth perspective.
Overall, Hammerson, Shaftesbury Capital and Nepi Rockcastle look poised to reverse 2024’s underperformance relative to their SA counterparts in the year ahead, even as the SA macro environment escapes from the doldrums of the past decade.
It all comes down to what is in the price, and it appears JSE-listed offshore property stocks have a reasonable margin of safety built into their valuations in relation to their promising prospects.
Kanyane Matlou is a senior portfolio manager for listed property at Terebinth Capital, part of the PPS Defensive Fund investment team
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