SAPOA ANNUAL CONVENTION &

PROPERTY EXHIBITION

Listed Property Sector Outlook

Bandile Zondo

June 2019

• SA REITS offer attractive yields but fairy priced on a 12 month view

• YTD performance reflects underlying weakness

• Very limited upside catalysts beyond a reform driven agenda

• Growth too weak to turn the tide (need > 2% GDP growth)

• Edcon managed for now but risk remains

• Pricing looks closer to fair and bottoming – Confidence crisis, Policy Reform & Eskom catalysts

• M&A opportunities but likely to remain muted - investors waiting until policy clarity

• Sector diversification helps cushion the blow

• Much of return in yield than capital – yields have priced for this but not NAVs

• Governance improving – SA BPR Second Edition

Total Returns to 31 May 2019

Underperformance in the past 18 months…

Source (for all data): I-Net Bridge, SBG Securities Research & Analysis

Date May-19 YTD 1 year 3 years* 5 years* 10 years*

Equities -4.8% 7.1% 2.4% 4.2% 5.4% 12.6%

Listed Property -0.9% 3.8% -4.8% -2.6% 5.9% 12.6%

Bonds 0.6% 5.3% 7.7% 10.5% 8.3% 8.8%

Cash 0.6% 3.0% 7.3% 7.4% 7.1% 6.6%

65

70

75

80

85

90

95

100

105

110

115

Listed property Equities Financials Banks Insurance

0

10

20

30

40

50

60

70

80

90

100

RES FFB NRP

…triggered by a collapse in RES, Fortress & Nepi

Listed property has

underperformed YTD and

over the past 3 years…

…triggered by the fall in RES

stable of companies, later

weak domestic fundamentals

unsustainable income

streams & global growth

concerns (UK Retail, Trade

war and EU growth)

RES concerns being

addressed, mainly:

Crossholding structure

(Company), Consolidation of

BEE trust (Company) and

share price manipulation

(FSCA)

Sector saw a 31% de-rating

in 2018 as earnings outlook

revised lower

SA REITs Association also

updating BPR to improve

disclosure and governance

YTD performance reflects underlying weakness

Source (for all data): SARB, Stats SA, SBG Securities Research & Analysis

SA macro outlook remains weak & any recovery likely to be protracted

% avg 2018 2019 2020 2021

Household

consumptionexpenditure (HCE)

1.8 0.9 1.6 2.8Consumer spending is constrained by weak employment and income

growth. Middle and high income groups can afford to take on more debt.

Gross fixed capital

formation (GFCF) -1.4 -1.0 3.0 4.0

Fiscal constraints and ongoing underspending weighs on public sector

capex, while a weak and uncertain economic outlook curbs private sector

fixed investment

GDP 0.8 0.6 1.8 2.5There is still downside risk to the near-term trajectory. Medium-term

growth should pick up if policy certainty improves.

Current account

(% of GDP) -3.6 -3.2 -3.8 -4.1Weak growth and supportive relative prices (terms of trade) constrains the

CAD.

R/$ (YE) 14.35 13.80 13.80 13.50The rand should recover from undervalued levels if there are credible signs

of policy reform and no further intensification of the global trade war.

CPI 4.6 4.7 4.7 5.0Inflation should remain subdued given the SARB’s credibility and a lack of

demand-driven price pressure.

Repo rate (YE) 6.75 6.50 6.50 6.75We expect a 25bps rate cut this year; the money market now expects at

least 2 cuts.

Source (for all data): SACSC, IPD, SAPOA, SBG Securities Research & Analysis

SA over-retailed – supply/demand imbalance

Much of the SA REITs biased towards retail

previously seen as a defensive asset class

Trading density growth slowing to historical

lows

Some 60% of store categories managed to

generated TD growth by reducing space

Also, worth noting that 60% of SA’s Economy

driven by HCE - low single digit growth

Community/Neighborhood (convenience)

centres outperforming larger malls…

..mid tier malls continue to struggle

Listed property exposures (excl. offshore)

-10%

-5%

0%

5%

10%

15%

Super Regional Regional Small Regional

Community Neighbourhood Total/Wtd Avg

Trading density growth weak @ 2.5% Trading density growth 2018

Retail, 59%

Office, 24%

Industrial, 14%

Other, 3%

4.3%

3.2%

2.5%

1.0% 1.0%

0.%

1.%

2.%

3.%

4.%

5.%

6.%

Source (for all data): Company data, SBG Securities Research & Analysis* Excludes 3 large tenants with long leases. Incl. these TD growth (%) was 1.9%

Listed sector TD growth slowed materially and retail rentals rebasing

Retail reversion (%) – listed propertyListed property trading density growth (%)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

ATT RES REB FVT* L2D VKE IPF FVT RDF GRT EMI HYP

2.8%

4.9%4.5%

2.6%

1.4% 1.3% 1.2%

0.0%

-0.1%-0.5% -0.5%

-1.8%

-3.3%

-4.6%

-5.4%

-6.4%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

L2D VKE IPF EMI RES Dipula EQU ATT FVT* FVT HYP GRT SAC RDF REB

0.4%

Source (for all data): SACSC, SAPOA, SBG Securities Research & Analysis

SC supply per unit of GDP & HCE

SA over-retailed – supply/demand imbalance will remain with us

Retail vacancies currently stand at 4.2%,

above the long term average of 3%

SA commands the third highest shopping

centre exposure per unit of GDP after US and

Canada

Yet pipeline for retail space remains unabated,

with SACSC projecting 500k sqm over the

next 2 years

Most notable schemes:

• Fourways Mall (Accelerate) – 100k

expansion

• Cornubia mall (Durban)

SA Retail yet to see the impact of changing

consumer habits globally

Retail pipeline & number of centresRetail pipeline & avg size/centre

124 308 449 493 195 68

18

1211

14

18

27

0

5

10

15

20

25

30

0

100

200

300

400

500

600

1970's 1980's 1990's 2000's 2010 -2016

2017a -2020e

Number of retail centres developed Average size ('000 sqm) - RHS

5.1%

3.3%

4.0%

3.5%

5.0%

0%

1%

2%

3%

4%

5%

6%

Super regional Regional Small Regional Community Neighbourhood

Retail vacancy (%)

Source (for all data): Company data (2018), SBG Securities Research & Analysis

Listed Property Exposure to Edcon*

SA over-retailed – Edcon challenges resolved for the time being

Edcon liquidation concerns largely bedded

down for the near-term as landlords and

banks agree to refinancing deal

Accounts for about 1.8% of SAPY

Some landlords agreed to a 41% rental cut for

a 24 month period (option 1)…

…while some opted to subscribe for equity (or

capitalize the impact) without compromising

rents (option 2)…

…to avoid setting a precedence and limit

contagion. Equally will not impact earnings

Some REITs have taken back (or expected to

take back at least 20% of Edcon space)…

…and looking to re-let in a weak demand

environment

* Based on 2018 exposures – yet to be updated for recent company results

8%

6%

7%

4%

5%

3%

2%3%

2%2% 2% 2%

1%1%

7% 6% 4% 4% 3% 3% 2% 2% 2% 2% 2% 1% 1% 1%0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

HYP L2D RES REB VKE APF AWA RDF IPF GRT ATT Fortress EMI SAC

Exposure % SA only Exposure % Group

Source (for all data): SAPOA, SBG Securities Research & Analysis

Office vacancies sitting at around 11% and have been largely

flat around these levels for sometime

In Q1-2019, vacancies accelerated across all grades with the

exception of B-grade

Prime vacancies recorded the largest quarterly deterioration

by nearly 2% over Q1-2019 due to new stock in Sandton

Annual rental growth remains flat (negative in real terms) &

mirrored by listed sector…

…although revenue from office landlords are negative due to

high incentives

In real terms rents have declined by 10% over the past

decade

Co-working or flexible office space the new buzz word with

WeWork entry into SA

Office vacancy (%) by grade Office vacancy (%) by region

Office vacancy (%) over timeOffice sector remains under pressure

Source (for all data): Google, SBG Securities Research & Analysis

Examples of incentives offered in the office market

0%

2%

4%

6%

8%

10%

12%

14%

16%

-400

-300

-200

-100

0

100

200

300

400 Net Absorption GLA ('000 sqm) Vacancy rate - RHS

Source (for all data): SAPOA, SBG Securities Research & Analysis

Despite the high vacancies, new office stock

continues to come into the market

Landlords using new better quality office stock as a

defense mechanism to defend against others cherry

picking their tenants

Much of the new stock over the past decade has not

been fully absorbed in the market…

…and office-to-resi conversions have not been

enough to anchor the vacancies

Need 1.1m sqm (or 100k new jobs) to be taken up

before sector is back to full absorption

About 56% of new supply of stock concentrated in 3

nodes in JHB, namely Sandton (25%), Waterfall

(16%) and Rosebank (14%)

Sandton office vacancies could climb to 20% if

speculative stock remains unlet

Pressure mounting on Sandton historical core

(Fredman, Grayston, Wierda & Sandown)

Office vacancy (%) by region

Distribution of new stock

26%

16%

14%

7%

6%

5%

5%

3%

3%

14%Sandton

Waterfall

Rosebank

Menlyn area

Umhlanga

Midrand

CBD CPT

Bellville

Bdfview

Other

Current vacancy (%) plus spec stock (%)

Office sector remains under

pressure

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

-100

-80

-60

-40

-20

0

20

40

60 Net Absorption GLA ('000 sqm) Vacancy rate - RHS

Source (for all data): SAPOA, SBG Securities Research & Analysis

5%

-4%-3%

-1%

1%

3%

5%

7%

9%

11%

13%

P A B C Sandton non P-grade

Sandton vacancy (%) vs absorptionsSandton rental growth (%) by grade

Source (for all data): Google, Companies, SBG Securities Research & Analysis

New Sandton Skyline

Source (for all data): SAPOA, SBG Securities Research & Analysis

INDUSTRIAL Sector- vacancies low, stable but rental growth slowing fastIn contrast to retail and office,

industrial vacancies have

declined from 5.2% in 2016 to

3.6% currently…

…and currently appear to be

stabilizing…

…however, rental growth

continues to slow now, which

is 4.6% broadly in line with

inflation

Steady growth in

manufacturing production –

back up to 2008 levels –

anchoring vacancies

New logistics product also

enjoying strong demand

However, this is expected to

reverse quickly as impact of

Q1-2019 load shedding filters

through

Source (for all data): Company data, SBG Securities Research & Analysis

Despite escalations of 6.5%-

7.5%, NPI growth under

pressures, average just over

3%

Lower than CPI - going

backwards in real terms

Office weakest at c-0.8%,

followed by industrial (+1.2%)

and retail at (+4%)

Impact of Edcon capitalized by

most landlords

Also headline rentals growing

faster than cashflow income

due to high incentives being

offered to let space

9.8%

7.1%6.4%

5.1% 5.0%4.0% 3.9% 3.8%

3.4%

1.1% 1.0% 0.8%

-3.0% -3.1%

5.1% 5.0%

3.2%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Reported LFL SBGe Overall Avg

Overall LFL NPI growth

4.0% -0.8% 1.2%

-4%

-2%

0%

2%

4%

6%

8%

Retail Office Industrial

FVT* IPF RES* HYP* GRT* RDF* SAC OCT* APF* REB* Avg

Segmental LFL NPU growth

Equity Capital raised (Rbn) Total number of transactions

39

70

83

37

58

41 44

129

31 313236

84

2921

0

20

40

60

80

100

120

140

2014 2015 2016 2017 2018

Office Industrial Retail

32.9

62.7

47.2

34.8

48.8

14.1

1.8

0

10

20

30

40

50

60

70

2013 2014 2015 2016 2017 2018 2019

Deal activity has slowed materially - Confidence crisis

Source (for all data): Bloomberg, Datastream, JLL, SBG Securities Research & Analysis

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8% Growth in demand for stock GDP growth rate (%)

0

10

20

30

40

50

60

70

80

90-6

-4

-2

0

2

4

6

Dec

-00

Sep-

01

Jun-

02

Mar

-03

Dec

-03

Sep-

04

Jun-

05

Mar

-06

Dec

-06

Sep-

07

Jun-

08

Mar

-09

Dec

-09

Sep-

10

Jun-

11

Mar

-12

Dec

-12

Sep-

13

Jun-

14

Mar

-15

Dec

-15

Sep-

16

Jun-

17

Mar

-18

Dec

-18

18-mth rolling Change in Liquidations (inv.)

Avg 18-mth rolling BConfidence - RHS

Demand for Commercial Property vs GDP growth (%) Company liquidations vs Business Confidence

Source (for all data): Stats SA, SAPOA, I-Net Bridge, SBG Securities Research & Analysis

Need at least (> 2%) GDP growth just to keep vacancies flat

Listed property premium to long bonds disappears, bottoming?

Source (for all data): Company data, INET Bridge, SBG Research & Analysis

5%

6%

6%

7%

7%

8%

8%

9%

9%

10%

10%

Listed property yield (excl. Offshore ) Bond Yields

Listed property rating/spread reflecting fundamentals

– fairly priced but bottoming

Source (for all data): Company data, INET Bridge, IPD, SBG Research & Analysis

0%

2%

4%

6%

8%

10%

12%

14%

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

1.4Spread (excl. offshore) LT avg Vacancy (%) smoothed RHS

Expensive

Attractive

Capitalisation rates lagging market cashflows Price-to-NAV – sector at a discount or fair?

Source (for all data): IPD, Company data, I-Net Bridge, SBG Securities Research & Analysis

Cap rates need to shift to reflect new norm

1.1x

0.9x0.9x

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

LT Avg P/TNAV (excl. offshore) P/TNAV

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

1.4

Spread (excl. offshore) LT Avg Cap rates RHS

Source (for all data): Company, SBG Securities Research & Analysis

Most SA REITs trading at discount to NAV but M&A activity

likely to remain muted

0%

5%

10%

15%

20%

25%

0.0x

0.2x

0.4x

0.6x

0.8x

1.0x

1.2x

1.4x

1.6x

1.8x

2.0x

P/TNAV SAPY FF Weights

Source (for all data): Company data, SBG Securities Research & Analysis

Lack of growth sees balance sheets come under pressure

0%

20%

40%

60%

80%

100%

120%

140%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Gearing levels/LTV (%) average just over 40% Offshore structures >60% geared on average

Asset sales to de-risk dilutive to earnings and offshore gearing aggressive

53%

0%2%

8%

29%

7%

1%

0%

SA

US

UK

OZ

Eastern EU

Western EU

Africa (ex-SA)

Other

Listed Property Index CompositionSA REITs Index composition

Diversification into CEE could help mitigate SA weakness

74%

0%

2%

5%12%

4% 2% 0%

SA

US

UK

OZ

Eastern EU

Western EU

Africa (ex-SA)

Other

Source (for all data): Company data, INET Bridge, SBG Research & Analysis

SAPY only 53% SA now , down from just

under 60% a year ago

Nearly a 3rd of exposure is now in CEE

which is seeing strong growth

UK property- retail apocalypse on

changing consumer habits and Brexit

• Fast casual dining market saturated

• Headline rents stable but cashflows

under pressure

• Retail valuations no longer hold

• NAVs discredited gold standard

metric

Wage growth and inflation in the CEE

CEE growth solid and likely to cushion SA REITs

Source (for all data): Colliers International, SBG Research & Analysis

CEE exposure has increased to nearly 30% of the listed sector

GDP growth forecasts remains strong

Wage growth strong and outpacing CPI – strong real sales growth expected

Real Estate market transaction activity remains robust

Poland now regarded as a developed Economy

Risks: Politics, concerns that Polish economy overheating, Global growth

slowing

CEE GDP growth (%) & forecasts

CEE Real Estate transaction volumes (EUR m)

0%

1%

2%

3%

4%

5%

Romania Poland Hungary Slovakia Czechia Bulgaria CEE 6

2012-2018 2000-2018 2019E-2020E Forecast

0

200

400

600

800

1000

2010 2011 2012 2013 2014 2015 2016 2017 2018

Much of the sector’s return is driven by yields and yields are attractive

50

100

150

200

250

300

350

400

450 Capital Return Total Return

54% Capital return

225% Capital return Jan 2009

170% income return

Source (for all data): I-NET Bridge, SBG Research & Analysis

Governance improving – SA REITS BPR Second Edition

Source (for all data): SA REITs Association, SBG Research

SA REITs have a strong record & proud history of self regulation

Second edition/draft of SA REITs BPR is currently in circulation for public comment

The purpose is to enhance transparency, comparability & on par with global REIT standards:

• Standardized calculations of non-IFRS measures which will be externally audited as well

• Branded SA REIT supplemental performance measures (e.g. “SA REIT DPS” or “SA REIT NAV”)

• Some of the proposed changes include but not limited to:

a) Dividend stripping (cum-dividend impact) shown separately

b) Dividend declared by associate companies after reporting period

c) “SA REIT NAV” to closely resemble “Tangible NAV” by excluding certain intangibles

d) Cost to Income ratios shown on a gross basis – i.e. including recoveries as part of revenue

e) “SA REIT vacancy rate” (NEW) – based on estimated “ERV” of vacant properties

f) “SA REIT LTV” - Consistency in the Loan-to-value (or LTV) calculation “

g) Various (e.g. Initial yields, admin cost ratios etc)

• Others includes various recons (IFRS to DPS, Cashflow from Operations to DPS) & Detailed property disclosures

Expected to be effective for financial year ends commencing on or after 1 Jan 2020

END