JSAPY | The Great Debasement

We believe disproportional debt allocation within the South African listed property sector has debased the dividend yield as a useful measure of value. The reduction of ZAR debt and increased allocation of debt to EUR, GBP, AUD and USD increases distributable earnings by lowering the weighted average interest cost. However, we believe that the total return profile of a business is unchanged by debt allocation across currencies. Equivalently, all income accretion earned through the allocation of debt offshore is ‘paid for' by a lower and more volatile NAV growth profile.

In this report, we therefore adjust for disproportionate debt allocation by reverse engineering the asymmetric gearing structure of each constituent in the SAPY. On a sector-wide basis, we find that even after including counters for which there is no impact, c.10% (or one percentage point) of the 12-month forward dividend on the index can be ascribed to debt shifting. The dividend yield available on the SAPY Index declines from an estimated 9.6% to 8.6% after our debt adjustment.