Coronation Property Equity Fund

PERFORMANCE AND FUND POSITIONING

The listed property sector erased all its Q1 losses despite the continued lingering conflict in the Middle East as investors seem to be looking through the inconsistent messaging of a potential long-term peace deal in the region. Despite the sector’s strong rerating (+10.5%) in Q2, partly driven by an improvement in the bond market, it remains at levels lower than the recent peak just prior to the outbreak of the conflict towards the end of February. Although companies continue to perform in line with expectations when operating results are reported, as was the case the last quarter, it is likely that the positive impact of the improved operating fundamentals may be overridden by investors’ cautious view on inflation, interest rates and the health of the consumer – prospects across all three took a blow in response to the spike, potentially temporarily, in energy prices.

From a relative performance viewpoint, the sector outperformed both the FTSE/JSE All Share Index (ALSI) and FTSE/JSE All Bond Index (ALBI) for the quarter. This also resulted in outperformance over 12 and 36 months, with the sector delivering annualised returns of 28.7% and 26.9%, respectively, over these time periods. Like Q1, positive momentum in unit trust-linked capital flows into sector-specific funds has been maintained, although the final numbers for the quarter must still be received, with support being received from a broad range of asset allocators, not only direct retail investors. The FTSE/JSE All Property Index’s (ALPI) one-year forward dividend yield is 7.2%, and that of the Fund is 7.1%.

Delivering a return of 10% for Q2, the Fund marginally underperformed the ALPI benchmark. Despite this, the Fund closed its relative underperformance over time periods of less than three years, while the relative performance marginally deteriorated over longer periods. Larger, more liquid locally focussed counters, benefitting from the continued positive flows into the sector, performed strongly over Q2. So did the smaller specialist counters, which were included in the ALPI at the end of Q1. Positions that added to the Fund’s relative performance for the quarter include the overweight positions in Fairvest B and Vukile, and underweight positions in Shaftesbury Capital and Equites. Unfortunately, our relative positioning in Redefine, Growthpoint, Spear REIT, Dipula, Sirius, and Attacq detracted all the value gained. During the quarter, the largest increases in exposure occurred in SA Corporate, Hyprop, and NEPI Rockcastle, with especially relative weakness in the latter providing an opportunity to continue increasing our holding. The most noticeable disposals include reducing exposure to Fairvest B, Stor-Age, and Resilient, partly driven by relative performance and to manage cash flows in the Fund.

The results season for companies with February and March reporting periods concluded in June. Compared to 12 months earlier, the earnings growth momentum of the reporting companies has improved substantially. Year-on-year distributable earnings per share (DEPS) growth for this reporting season came in at 4.7%, while dividend per share (DPS) growth came in at 6.9%, with an average payout ratio of 87.8%. This compares to 1.3% EPS and 1.0% DPS growth 12 months ago with a consistent pay-out ratio over the two periods. Companies continue to capitalise on the increased capital flow into the sector, overall lower cost of capital (both equity and debt) and improved operating environment by drawing on the market for more equity to have balance sheet capacity for potential acquisitions or portfolio enhancements. During the quarter, names like Fortress, Fairvest, Vukile, and Spear REIT all successfully placed new equity in the market. When the offshore names are excluded from these numbers, the SA-centric names delivered distributable earnings and dividend per share growth of 7.8% and 7.9%, respectively, with an average payout ratio of 88.0%.

The SA Property Owners Association (SAPOA) released its Q2-26 office vacancy survey. Positive momentum remains visible within the office sector with vacancies once again reaching a post-Covid low at 12.1%, down from 12.6% in Q1-26 and 12.8% in Q4-25. This came as a result of an improvement across all office grades, with A & B grade offices, which make up close to 80% of all office space in South Africa, driving the decrease in overall numbers, declining by 0.5% and 0.6%, respectively. The demand for space is a positive catalyst for creating rental tension and although not at record levels, asking rentals continue to see an improvement, with year-on-year (y-o-y) growth for space to be leased on the market at 7.4% y-o-y higher rental levels, up from 5.7% and 6.7% from six and three months ago, respectively. On a city level, Tshwane was the star performer, down from 9.9% to 8.5%, with several nodes driving this performance, including Centurion, Hatfield, Highveld Technopark, and Menlyn. Cape Town still has the lowest vacancy of the major metros at 6.2%, although it is marginally higher than the 6.0% recorded three months ago. Development as a percentage of gross lettable area marginally decreased during the quarter from 0.8% to 0.7%, with 138 000m² of developments on the go countrywide. Despite some return of optimism, which usually is reflected in development activity, the number still compares favourably to the long-term average of 490 000m², indicating still a good natural tension between supply and demand, which is required for sustainable asking rent growth momentum. With 71% of the space currently being developed already leased up, an improvement from the 58% recorded last quarter, the signals for a continuation in office market improvement are encouraging.

The SA Council of Shopping Centres (SACSC) published retail trading data related to Q1-26. The weighted average y-o-y growth in trading densities improved in Q1-26 to 4.3% from 3.9% in Q4-25. The improvement was mostly because of stronger growth momentum out of super regional, community and neighbourhood centres (a reversal of the negative movement in the smaller centre sizes experienced quarter-on-quarter into Q4-25), with grocery trading momentum improving, albeit still being negative. Grocers are an important retail category for smaller convenience-led centres due to its dominance within these centres, dramatically impacting overall growth out of these centres. Super regional and small regional centres delivered the strongest growth, led higher by a good performance from the apparel category for super regional and the department store and grocer categories for small regional centres.

OUTLOOK

The sector’s prospects over the coming months hinge on how the market weighs geopolitical and macroeconomic risks against improving fundamentals and companies’ capital allocation decisions that support future growth.

As illustrated by the MSCI SA Property Index for 2025, released in April, which gives an indication of direct local commercial property returns covering an estimated 55% of the local direct commercial market, momentum has returned in capital value growth while there is a strong recovery in net operating income growth, up from 4.0% in 2024 to 5.9% in 2025 with higher base rental growth and higher cost recoveries behind the improvement. These numbers echo the recently reported operating results from the listed sector.

Against this backdrop investors are likely factoring in continued strong inflation-beating earnings growth, supported by a stable bond market. Key for the sector is whether the primary drivers of improved earnings growth (i.e., lower vacancies, improved rental reversions, better cost management due to the higher penetration of solar and electricity battery storage solutions and overall lower or at least stable funding rates) can continue to fulfil market expectations. We believe that in the short to medium term it should be able to maintain the current earnings growth momentum, justifying the current rating relative to other asset classes and result in a return of through-the-cycle total returns of 10%-15% per annum.

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