South Africa's REIT sector recuperates in February

South Africa's real estate investment trust (REIT) sector has been on a rollercoaster ride over the past five years, with the COVID-19 pandemic playing a significant role in shaping the performance of key players in the industry. Despite the challenges faced in 2020, the local property sector has managed to bounce back, emerging as one of the best performing asset classes on the Johannesburg Stock Exchange (JSE) in the last two years. However, this recovery has not been uniform across all players, with some companies experiencing divergent trajectories. One such example is the contrasting performance of Growth Point Properties and Redefine Properties, two major players in the South African property market. Daniel King, Head of Fixed Income at Merchant West, sheds light on the reasons behind the varying fortunes of Growth Point and Redefine. According to King, the divergence in their share prices can be attributed to the initial impact of the COVID-19 crisis on their balance sheets, with Redefine bearing the brunt of the market perception regarding its debt levels. Despite this short-term disparity, King notes that over a 10-year period, the performance of both companies is relatively similar, albeit underwhelming compared to other asset classes like bonds. One of the key points of contention highlighted by King is Growth Point's offshore investment strategy over the past decade. He raises concerns about the company's persistent discount to its net asset value (NAV) since 2018, largely driven by what he perceives as ill-advised offshore acquisitions. These acquisitions, primarily debt-funded and denominated in foreign currencies, have not only strained Growth Point's balance sheet but have also undermined its NAV growth potential. King suggests that the company could benefit from strategic disposals or unbundlings to unlock shareholder value and address its discounted stock price. In contrast, Redefine Properties faces a different set of challenges, with its comparatively smaller scale and asset base limiting its options to narrow the discount to NAV. While King acknowledges the potential for Growth Point to realign its strategic focus and improve its market positioning, he remains cautious about increasing exposure to the company until tangible steps are taken to address the NAV discount. The insights provided by King offer a detailed analysis of the intricacies within the South African REIT sector, highlighting the nuances that shape the performance of key players in the industry. The contrasting fortunes of Growth Point and Redefine underscore the challenges and opportunities present in the sector, as companies navigate the post-pandemic landscape in search of sustainable growth and value creation.