Shifting foundations

It has been more than a year since lockdown restrictions in response to the COVID-19 pandemic became a reality. The eerie footage released of deserted streets, grounded aircraft fleets and empty trains was not from a Hollywood studio, but rather an accurate depiction of the effect of lockdown regulations. As more and more employees around the world started working from home to curb the spread of the virus, the financial markets etched the numbers into the history books. Locally, for the quarter ended March 2020, the All Share Index fell 21.4% and the Listed Property Index by an astounding 48%^[1].

As financial professionals, we may have and are still witnessing the ultimate test of bricks and mortar. South Africa muddled through 2020 experiencing various rounds of restrictions, continued load shedding, debt sustainability woes and increased levels of poverty as the already battered economy took more strain. As many industries struggled, buildings stood unoccupied and property as an asset class was severely impacted by diminishing rental collections and altering trends accelerated by the pandemic.

By the third quarter of 2020, following the relaxation of lockdown regulations, the country’s spending numbers recovered to an extent. Mobility trends continued to improve, driven by a growing number of people gradually returning to their places of work, coupled with a recovery in visits to places of shopping and dining. Tenant cash flows started showing some recovery, leading to an improvement in rental collections.

In line with global equity markets, the South African listed property markets had a strong fourth quarter. The turning point in performance was noticeable following the outcome of the US elections and positive news on various coronavirus vaccines in November. The SA Listed Property Index outperformed other asset classes for the fourth quarter, posting a 22.2% return, a stark contrast to the first quarter of 2020. Although the performance of the listed property sector was notable during the quarter, it does not mask the severity of the losses experienced prior to and during the pandemic, as the sector still lags the performance of other asset classes over a period of five years.

The COVID-19 pandemic has highlighted underlying vulnerabilities that will structurally change the way investors view property as an asset class into the future. At Momentum Investments, we have navigated through the crisis with a clearly defined investment strategy, while not negating the transformational trends that are underway.

It is evident that specific sectors within the property sector are being tested more than others. The retail property sector has been under pressure long before the pandemic, as more shoppers became comfortable shopping online. The pandemic, however, has accelerated online adoption and largely shifted consumers to online traffic, increasing e-commerce penetration. To quote Lawrence Koikoi, co-portfolio manager of the Momentum Real Growth Property Fund, “retail landlords need to disrupt themselves before being completely disrupted. We have seen some retail space being converted into last mile logistic facilities to accommodate for the increased e-commerce demand, as well as other alternative use in the US. These global trends could be very important to heed in pre-empting the impact of high e-commerce penetration in the future.”

We have invested in carefully selected companies that benefit from the structural changes accelerated by the pandemic and continue to monitor the idiosyncrasies of each sector within the property market both locally and on a global scale.

Further to keeping our eye on foundational shifts, our preference remains to be invested in well-capitalised businesses which can remain resilient through different economic cycles and evolve to ensure their sustainability and relevance well into the future.

Environmental, social, and governance (ESG) investing is integral in our investment process. With us, investing is personal and supporting companies that will shape the transformation of the South African property landscape and change the way South Africans live and work is of paramount importance to us. We are committed to the wellbeing of our countrymen and remain deeply anchored in our outcome-based investing philosophy and process. We are unwavering in our belief that a well-constructed diversified portfolio, including property, is the most efficient way to achieve the long-term personal investment goals of clients.

_{DISCLAIMER
Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider (FSP 6406).}

_{^[1] Source: Momentum Asset Management, March 2020}