South African Listed Property – Better Value, but the Growth has Disappeared

SA Property has been a consistently high performing asset class for the last two decades, with returns only briefly interrupted by the financial crisis of 2008. SA property investors have experienced annual dividend growth of 8% since 2005 and this has driven capital growth in the sector.

This year the property sector has experience a significant draw-down with a fall of close to 30% year to date. The first quarter saw the collapse in value of the Resilient stable of companies. The extent of fraudulent activity within these companies remains to be seen, but the price fall is largely due to the fact that these stocks were trading at large premiums to their Net Asset Value. We avoided all the Resilient related stocks as they were extremely expensive, and we believed that the growth reported was unsustainable.

Once the Resilient story had played out, the rest of the sector came under pressure as the market began to realise that growth had vanished.

The Quality of Earnings Growth has Fallen Sharply

The reality is that most companies in the sector have been struggling to grow earnings for a number of years due a lack of economic growth and low business confidence. Lower rent escalations and negative reversions (lower rent) on expired leases have become the norm. Property companies have been under pressure to continue showing high dividend growth and they have engaged in a number of financial “shenanigans” in order to report a higher growth number to investors. These financial engineering strategies include:

• Highly leveraged offshore acquisitions
• Debt/Swap Restructurings
• Cross Currency Swaps
• Distributing Fees and Once off gains (at expense of property values)

Property companies have also increased the concessions they have been willing to give tenants for both new leases and renewals. They are giving longer rent-free periods and have increased their contribution to tenant installation costs. The effect of these concessions has been to overstate rental levels and hide some of the weakness in the sector.
We have been cautious on the property sector for the last three years given the deteriorated letting prospects in a poorly performing economy. The market has finally realised that much of the growth in recent years has been an illusion.

Valuations are Beginning to Catch Up with Reality

The decline in growth prospects for the sector is finally being reflected in valuations as the starting yield on the sector has increased significantly. Since the beginning of 2017, the trailing yield on the JSE REIT Index has increased from 6,5% to its current level of over 9%. While this is partially attributed to the derating of the Resilient stable, the yield on all stocks has shifted higher to compensate for the diminished growth prospects.


With the headwind of lower, or even negative growth from property companies, we continue to remain cautious on the sector. SA investors have been spoilt with very attractive returns for a long time, and the adjustment to a lower growth environment will take time. However, much cheaper valuations warrant some additional exposure and we have been adding SA property to our funds at these cheaper levels.


An Uber Valuation for Uber is Unwarranted

Uber is preparing for an IPO and the bankers are delivering initial valuation estimates of around $120bn. While investment banks compete to secure the deal by pitching increasingly unrealistic valuation numbers, the IPO is likely to be pitched well above the last valuation level of $68bn.


The $68bn valuation is a fictional starting point

The story around how UBER maintained its $68bn valuation, even as its sold shares at a $48bn valuation, reflects the irrational state of the market. Summary: Softbank wanted to buy $10bn worth of UBER while it was theoretically valued at $68bn on the private market. Softbank bought $9bn at a $48bn valuation and after that bought $1bn at a $68bn valuation. Uber gets to maintain the illusion of being worth $68bn. Softbank gets an immediate gain on the $9bn it bought at the cheaper price. Everyone wins.

What is a realistic valuation for UBER?

Professor Aswath Damodaran of NYU has done a number of valuations of UBER  and he shares the spreadsheet used to calculate the his value of $36bn.  The spreadsheet has very useful data on a operating margins in a range of industries. Damodaran uses a sustainable margin for UBER of 20%, which is almost twice the market average of 10,5%. Even with his generous assumptions he gets a valuation well short of what the banks are indicating for the IPO.

What if people stop using the UBER app?

UBER has spent almost $11bn over the last years in building a strong lead in the car service market. However, it is not clear that they have a sustainable competitive advantage. Despite its current dominance, there are no network effects, so they don’t “own” the customer. Using UBER in Europe I have seen many taxi drivers with 3 phones who are happy to pick up any passenger whether its UBER/Lyft/Mytaxi, depending on what is most profitable. Recently, Taxify has integrated with google maps in South Africa so it is very easy to do the comparison of taxi services in terms of cost and time to pickup. These are screenshots of the google maps app looking for a taxi from my work to the waterfront. I see that in the UK google maps gives you three options (UBER/Mytaxi/Gett). With this integration there is no longer any reason to go straight to the UBER app when you need a taxi.

Ride Hailing Will be a Commoditized Service

You now have a commodification of the ride hailing service on both the drivers and the rider side. The cost of developing a competing app is trivial, and if google maps (or apple maps) is the new access point for passengers, then new entrants will be able to compete directly with UBER from day one. All they need to do is give google a cut. In this environment a high margin for ride sharing companies is unsustainable, and it is likely to be lower than the average in the economy. If that is the case, then UBER is only worth only a tenth of the $120bn that its bankers are currently pitching.