Chairman’s Message and 2021 Sector Outlook

Estienne de Klerk

Chairman, SA REIT Association

Real estate has long been a rewarding sector of the financial markets. Like all sectors, share prices and the underlying fundamentals of commercial property assets weakened in early 2020, as South Africa and the rest of the world came to grips with managing through the pandemic, with some sectors suffering more than others.

SA REITs recovered somewhat in the final months of 2020, indicating the potential start of a long-term uptrend in the real estate sector. The outlook for 2021 remains uncertain, in part because the global Covid-19 crisis is anything but over. The pace and extent of the sector’s improvement rely on the availability of vaccines and the effectiveness of vaccination programmes locally in the first instance, but also globally. REITs stand to reap significant benefit from a potential rebound in economic activity once vaccines become widely available. The result is likely to be a stronger latter-half for the sector, gaining momentum towards a more complete recovery in 2022.

Whilst the pandemic exacerbated South Africa’s underlying economic weakness, and much rests on an improvement in economic conditions, it is encouraging to witness how property owners who are key contributors across the whole South African economic value chain have demonstrated their commitment to the country, and SMMEs in particular, by providing Covid-19 related rent relief that has helped thousands of businesses stay afloat.

With 2021 now firmly underway, sanity is slowly returning to the investment markets. For now, many REIT counters remain mispriced and offer excellent value propositions for investors, while being underpinned by quality assets, driven by skilled and experienced leadership and fuelled by the proven agility and tenacity of the REIT sector and SA Inc.

The significant reduction in short term interest rates will also provide some support for further recovery in the economy as well as the SA property sector. The tailwind of lower interest rates not only reduces the cost of capital to the SA REITs but should also play a role in the rental demand dynamics for space over the medium term.

While the lockdown pushed pause on corporate activity and deal-making last year, we may see some corporate action like takeovers and mergers as this year progresses, as well as some de-listings in the sector. Balance sheet strength, regulatory compliance, quality lease covenants and strong leadership will continue to come under the spotlight for SA REITs in 2021.

The SA REIT Association and its members continue to play an active part in supporting the sector through ongoing engagements with stakeholders that have recently resulted in a number of milestones. Following lengthy and robust consultations with The Commissioner for the South African Revenue Service (SARS), a resolution was finalised on the VAT Apportionment matter, meaning that REITs may determine the extent to which VAT may be deducted as input tax on mixed expenses based on a varied turnover-based method of apportionment. Additionally, the National Appeals Committee and SARS no longer regard tenant deposits as gross income and agrees that tenant deposits can be excluded from taxable income. These are significant developments for the sector that will benefit all members during these challenging times and beyond.

We have no doubt that in 2021 the sector will reaffirm to investors, funders, regulators and other key stakeholders that SA REITs remain a well governed and attractive asset class. SA REITs remain the most accessible liquid and cost-effective way to own property which is a key pillar of every Diversified Investment Portfolio.

Redefine Properties’ board resolves not to declare FY2020 dividend

JSE listed diversified real estate investment trust Redefine Properties has announced the decision by its board to resolve to not pay a dividend in respect of FY2020 in the face of ongoing Covid-19 uncertainty. The board explained that it had considered the needs of all stakeholders in the context of a rapidly changing trading environment. The decision is consistent with Redefine’s focus on preserving liquidity, protecting its loan to value (LTV) ratio and maintaining its REIT status, whilst complying with the solvency and liquidity test contained in the Companies Act.

The board considers this to be the most pragmatic course of action until the impact of Covid-19 becomes clearer. This is the first time in Redefine’s 22 year listed history that it has not declared a dividend, but the decision follows that of many other companies globally and locally in the face of ongoing uncertainty. The decision whether or not to pay a dividend was also necessitated, after the JSE disallowed an alternative distribution mechanism, which Redefine had proposed last year.

In order to retain its REIT status, Redefine is required to distribute at least 75% of its total distributable profits as a cash distribution to its shareholders by no later than six months after its financial year end, which is subject to meeting the solvency and liquidity requirements of the Companies Act.

Redefine CEO, Andrew Konig, explains that Redefine will not lose its REIT status following this decision. “The board concluded that, while Redefine clearly satisfies the solvency leg of the solvency and liquidity test, there may be insufficient headroom to absorb any further material negative LTV triggers if a cash dividend was paid, which could potentially lead to a breach of the LTV debt covenant ratio with one or more funders after the 28 February 2021 measurement period and result in adverse liquidity consequences.”

A REIT’s obligation to make the minimum 75% distribution is contingent upon its board reasonably concluding that the REIT will satisfy the solvency and liquidity test after having paid such minimum distribution.

“Facing unprecedented operating conditions in the real estate sector and little visibility into the future as a consequence of the outbreak of the second and possibly more waves of the pandemic, we believe we have no choice but not to declare a dividend as a means of preserving shareholder value and protecting our balance sheet,” adds Konig.

“We are working hard to streamline our asset platform and strengthen the balance sheet to withstand the ongoing volatility and uncertainty, at the same time ensuring we are poised to benefit when conditions improve. We will return to a consistent cycle of dividend payouts as soon as we have greater visibility of the impact of this pandemic on trading conditions.”

The board’s assessment was that the company’s LTV debt covenants on the assumption of no further adverse market circumstances would not likely be breached. However, given the ongoing and potential adverse impact of the Covid-19 pandemic, it needed to take into account the possible impact of factors outside of Redefine’s control and which may materialise within the 12 month period after payment of the dividend.

The factors at play include the impact of foreign exchange fluctuations, property valuations, valuations of investments, timing of LTV reduction interventions including disposals, the outbreak of subsequent waves and any associated increased and extended lockdown regulations locally and internationally.

“Capital and liquidity are the order of the day. The near-term outlook is clearly challenging and without precedent; however, we are confident that over time the strength of our portfolio both here in South Africa and Poland, rigorous balance sheet management, rationalisation of our asset base and in particular, our cash-flow generation capabilities will shine through,” adds Konig in conclusion.

“We are hopeful that the global roll out of vaccines and our government’s own efforts to acquire some 20 million doses during early 2021 will return confidence to the markets. Redefine remains a financially sound business with a capital structure that is well placed to absorb a prolonged period of uncertainty.”

CEO’s 2020 Wrap-up Message

Wrapping up a year like no other

SA REIT Association 2020 Wrap-up Message by CEO Joanne Solomon


2020 will go down as one of the most challenging years in recent times, marked by enormous uncertainty from a human and social perspective, requiring unprecedented adjustments to the way we live, work and play. However, what is evident about 2020 is a sense of resilience and unity as the world faced a common challenge, COVID-19.
The pandemic has forced countries, industries, companies, associations and individuals to acknowledge that the structural societal changes regarded as a ‘nice to have’ less than a year ago are now requiring urgent attention. There are no doubts that 2020 has presented the same reality for our members which were already facing significant socio-economic headwinds and structural changes across sectors.

Repositioning for long-term sustainability

For the SA REIT Association (SAREIT), 2020 was always set to be the year of repositioning. The new strategy and resources will support our intent to reclaim relevance as the industry’s voice and, most importantly, to create a platform for stakeholders to work collectively in ensuring that REITs are positioned for long-term sustainability by addressing key issues proactively.

From the onset of the pandemic, SAREIT recognised its role to drive a collective approach for the broader property sector, not just REITs. We initiated the formation of the Property Industry Group (PIG) together with the South African Property Owners Association (SAPOA) and the South African Council of Shopping Centres (SACSC) which helped the industry navigate the initial months of the pandemic. PIG certainly proved to be an invaluable platform to address the unprecedented challenges resulting from the government’s response to COVID-19 and ensure the survival of the entire sector’s value chain.

Our committees continue to drive new and current workstreams leading to the well-received Second SA REIT Best Practice Recommendation for Financial Reporting, with the JSE considering it a benchmark for other sectors to follow. We are also looking forward to resolutions on various issues, including the VAT Apportionment matter, in the new year.

While engagements don’t always result in mutually beneficial outcomes, as was the case regarding temporary amendments to the REIT legislation earlier this year, I am certain that we are laying solid foundations to help our industry navigate challenges in the long-term.

No pain, No gain

The property sector is a long-term game, and despite its current performance, our asset class has proved its resiliency over many cycles and will continue to be a material contributor to the South African economy.

Having been involved in the industry for over two decades before taking on my new role as SAREIT CEO in May, I know that even though the structural changes due to economic issues precipitated by the pandemic, the property sector will continue to present an attractive investment proposition due to its size, diversification and tax advantages. I look forward to seeing the response of property companies as they, in turn, leverage disruptive technologies and reimagine their business models for continuity and sustainability.

I strongly believe that once the economy starts to recover, the sector will improve and regain its position as a stable asset class offering unmatched benefits to investors.

Building ahead

Much has been achieved in the past year, and SAREIT’s investments in capacity could not have come at a better time. Many essential building blocks have already been put in place, including new digital assets, enhanced stakeholder communication and engagement programme as well as the establishment of the new research and institutional committees.

The Association is entering 2021 on a strong footing, backed by a sound strategy and clear objectives that will see us fully assume our role as the voice of the industry and deliver the right level of support for our members. Maintaining open dialogues with government, regulators, other business associations, and various interested parties will be critical to ensure that we help establish a sound and conducive business environment to support South Africa’s recovery.

I would like to take this opportunity to thank our executive team and committee members for their dedication during a difficult year personally and professionally for many. I look forward to continue working with all of them, and our many stakeholders to drive good governance, innovation and international best practices that will ensure that the successful track-record of REITs as an investment class is maintained in the long-term.