As balance sheet risks have increased, the majority of the sector has shifted their short-term strategy to focus on lowering gearing levels through asset disposals and portfolio rationalisation. In an environment of limited transactional activity and low liquidity, assets which would not have ordinarily been sold are now being considered for disposal. This will likely result in shifts in the underlying geographic exposure as companies embark on their disposal programs. We have already witnessed evidence of this change with Redefine (sold remaining Australian investments and its UK investment RDI), Attacq (sold portion of its MSP stake) and Investec Property Fund (sold a portion of its European logistics platform).
Domestic fundamentals remain weak due to an oversupply in most subsectors, slow economic recovery forecasted, increased vacancies and negative reversions on renewals will likely persist in the short to medium term. Top line pressures coupled with above inflation expense growth will continue to put pressure on like-for-like net operating income growth. Despite the weak fundamentals, we have also witnessed signs of improvements during the year with retail trade gradually recovering, future office supply which contracted to historical lows and industrial demand which has increased due to the structural change in the retail landscape. The SARB has also cut the repo rate to the lowest levels since 1998. This will benefit REITs as debt is renewed at lower rates.
The advent of the second wave, reintroduction of partial lockdown restrictions and uncertainty on the pace of the vaccine rollout is likely to weigh on short term expectations. Our forecasted forward funds available for distribution (FAD) is 10.86%. We expect moderate growth off this low base taking lower GDP and lower short-term inflation forecasts into account, which has translated into lower market rental growth across most sub-sectors. Notwithstanding the rebound in the last quarter of 2020, our 5-year annualised total return forecast for the sector remains attractive and ranges between 14% and 17%.