Investors see value in property
A private equity group would not have to worry about maintaining conservative debt levels or regular dividends
Private groups are ready to swoop on listed property funds, which are trading at huge discounts to their net asset value after 2018 became the sector’s worst year in more than two decades.
Private groups are ready to swoop on listed property funds, which are trading at huge discounts to their net asset value after 2018 became the sector’s worst year in more than two decades.
Analysts say the first sign that these funds, which include wealth managers and private equity players, were becoming interested in the sector was when mall owner Safari Investments received an offer from unlisted ComProp earlier in 2019. Private investors are also understood to be holding on to their shares in Delta Property Fund and Rebosis Property Fund, two listed companies that announced merger talks in August as they look to alternatives, such as taking the two companies private.
Nedbank’s private wealth arm Nedgroup Investments has maintained its 9.1% holding in Delta, as well as its 7.3% stake in Rebosis, even though both companies’ share prices have lost 90% of their value in 2019.
Ian Anderson, chief investment manager at Bridge Fund Managers, said this could indicate that significant shareholders in the two listed groups would rather see Delta and Rebosis delisted and taken under new management.
Nedgroup was not available for comment.
The FTSE/JSE SA listed property index (Sapy), which consists of the top 20 liquid real estate companies by market capitalisation, suffered a loss of 25.26%, inclusive of capital growth and dividends in 2018, and its recovery in 2019 has been slow, growing 2.1% so far.
Delta and Rebosis both underperformed in 2018 and have been trying to bring down their debt levels and are selling assets to raise cash to meet dividend expectations.
They are not the only companies trading at significant discounts to net asset value.
Anderson said that while the two companies may feel they can sell assets and decrease debt levels once they are merged, a private equity group would not have to worry about maintaining conservative debt levels in line with the listed sector or making regular dividend payments.
Unlisted ComProp’s attempt to buy listed Safari Investments is testament to how private companies see value in listed property funds trading at large discounts to net asset value, Anderson said. “I think ComProp will be the first of a few private groups to take listed real estate investment trusts private. The listed groups have cleaned up some of their problems and we have been getting inquiries from private investors who see value in the sector.”
Consolidation has been used as a tool to weed out weaker and smaller property groups in the past, but merger & acquisition activity has dried up over the past two years, Anderson said.
“I’m surprised that we
haven’t seen private equity play a role in property, such as it has in other business sectors during hard times, but I think this will change now. Consolidation used to be what typically happened among listed funds but it just isn’t happening now.”
Keillen Ndlovu, head of listed property funds at Stanlib, said Sapy is trading at a 15% discount to the actual value of its fixed assets, making it attractive to investors who want to take some listed real estate funds private. Listed funds will find it challenging to sell assets in the rest of 2019 and 2020, he said.
Those funds who want to sell their assets to bring down their debt-to-asset levels, or to raise cash to sustain dividend payouts, will have to discount assets by between 10% and 20%, according to Ndlovu.
He said private equity groups do not have to answer to shareholders and can hold out and wait for asset buyers while the economy recovers.