Rand weakness set to have some investors smiling all the way to the bank
That explains why, as if to defy gravity, the rand, already a poor performer last year, has started 2016 lunging, depreciating even further against global currencies. It was suffering way before the festive season started, causing some to cut down on the festivities, while others tweaked or delayed their foreign travels. Pundits say the currency is partly sapped by a slowdown in China, the world’s largest economy. But then, China is often cited as a factor.
At almost R18 against the US dollar (before attempting a comeback to below R17), the rand has, in a space of five months, taken much pain since late August when it breached the R14 mark. The previous worst level was R13,86/US dollar that the SA unit reached back in 2001. The African unit is worth just over R19 against the euro, itself lagging the greenback.
Since the rand affects all facets of our lives, punters – both in the property sector and elsewhere – are keenly watching its movement. Of course, those invested abroad, are watching with glee. It’s the opposite for those wanting to put their money in foreign markets.
For context, explains Sesfikile Capital director Mohamed Kalla, some 35% of the SA listed property sector has a see-through exposure to offshore assets. “A weaker rand will mean that these stocks will do better in rand terms,” he tells eProperty News. But, he adds, broadly speaking, a weak rand “is bad” for the property sector and the economy at large. Arguing the rand is oversold, Catalyst Fund Managers’ Zayd Suliman is not delighted either.
Suliman says: "Many SA listed property companies such as Resilient, Fortress, Redefine, Vukile & Rebosis amongst others, to varying degrees own properties offshore and will thus benefit from the weakening rand (2015 depreciation of 34% to the US Dollar) as the foreign denominated income and assets will be higher in Rands. Thus, the net asset value and distributable income will be higher."
Players such as Delta Africa, Growthpoint, Pivotal and Redefine, which derive a portion of their earnings from foreign markets, seem poised to gain from currency conversion. Take Growthpoint, the country’s largest REIT valued at R62.5 billion in market cap and whose Australian asset held 51 properties valued at nearly R21 billion (of which the JSE-listed firm held 64%). That was in September 2014, when the local unit was worth around R11 per US dollar.
On the strength of conversion alone, the value has, on the surface, surged in SA currency terms to breach the R30 billion mark.
Flip the coin and the result remains positive but less mouth-watering. The Australian unit, which is what Growthpoint Property Australia or GOZ earns, hasn’t left the rand that far behind. While the Aussie dollar was worth around R10 in 2014, it now hovers at around R12 (but softened against its US peer and euro).
That implies a gain of barely a quarter the last 15 months, which would in turn lift the GOZ portfolio to about R25 billion. Regardless of which currency dynamics are at play, but assuming the rand sustains at these levels, the old hand Norbet Sasse-led group’s bottom line could benefit from the determined tsunami: rand weakness.
The same goes for the R45 billion Redefine which had a torrid 2015 on the JSE – eroding shareholder value. While Marc Weiner’s group is heavily reliant on the home market, it earns a part of its revenue from Australia and Europe. While the latter claims 7.8% of Redefine’s property asset, Down Under is home to 7.5%.
SA, on the back of a buoyant Gauteng market (home to 215 of the 333 properties worth a hefty R51 billion), accounts for the remaining chunk of group property assets and 83% of Redefine’s total distribution.
Regardless of the quantum Redefine – like Pivotal and Delta Africa, both on a drive to grow their presence outside SA – derives from abroad, the continued weakness in the rand is sure to boost the figures post-conversion.
“A weaker rand will push the rand earnings/returns of hard currency denominated counters,” says Kalla, noting that Capital & Counties Properties, Intu, Nepi and Stenprop have “100% offshore exposure”. Also on that list are Mas Real Estate, Redefine International and Rockcastle. Companies with “high offshore exposure”, as the Sesfikile director puts it, include Fortress and Resilient – both fine performers on the JSE.
Sulaiman worries about the prevailing scenario hurting the rand, compounded by global risk aversion, set to negatively impact on foreign investor demand for SA listed property. Much as the rand appears oversold, “catalysts for a re-rating do not appear on the horizon”.
Things work out differently for foreign-based investors. Some in this category is in line to receive rand-denominated dividends, though they tend to view their investments from the perspective of hard currencies. However, because the rand has depreciated markedly against these, foreign investors can’t be looking forward to fatter dividends come end of the year. In fact, it’s almost a given that dividends will fall in dollar and euro terms.
Still, the upside is that such softness provides foreign investors an opportunity to pile in. From the angle of euros, say, JSE-listed stocks are dirt cheap right now. Against this background, expect inflows. Right there, heat wave or tsunami aside, is something to smile about.