Property funds’ integration stalls
Weak growth, low Covid vaccination numbers and riots deter buyouts
The much-awaited consolidation among listed property funds in 2021 is being delayed as investors are cautious to back deals while economic growth is weak, vaccination numbers are low and riots are damaging real estate in some metros. Head of listed property funds at Stanlib Keillen Ndlovu told Business Day that listed property funds that may have considered transactions a few months ago are cautious to do deals given mounting problems in SA.
The much-awaited consolidation among listed property funds in 2021 is being delayed again as investors are cautious to back deals while economic growth is weak, Covid-19 vaccination numbers are low and riots are damaging real estate in some metros.
Head of listed property funds at Stanlib Keillen Ndlovu said that listed property funds that may have considered buying out smaller companies or asset portfolios a few months ago were cautious to do deals given mounting problems in SA.
Looters and rioters ran amok, particularly in KwaZulu-Natal and Gauteng last week.
More than 200 malls were looted or destroyed and more than 600 stores were torched or damaged. Distribution centres and ports were also attacked.
While the unrest made international news that could lead to offshore investors becoming more circumspect about spending their money in SA, Ndlovu said the commercial property market remained in a precarious position.
“I don’t think the situation has changed that much. Right now listed real estate investment trusts [Reits] are each looking at their own issues. They are disposing of assets as they try to decrease their relative debt levels,” he said.
Ndlovu said property funds were also set to see further devaluations to their assets after the persisting economic lockdown imposed to curb the spread of Covid-19 across SA.
“I can’t see this state of uncertainty changing in 2021. Only once the property funds have sorted out the majority of their issues will they consider buying others,” he said.
Executive director at Meago Asset Management Jay Padayatchi said uncertainty is weakening the case for consolidation.
“I think we in SA have just been faced with a lot more uncertainty that is slowing the pace of consolidation. Rioting and looting together with the slow vaccine rollout just creates a lack of visibility for most companies,” he said.
Evan Robins, a fund manager at Old Mutual Investment Group, said investors were looking for catalysts in SA’s economy. As the vaccination rollout gathered pace, confidence could return.
This week, more than 1-million South Africans aged 35-49 years are registered to be vaccinated against Covid-19.
The last wave of consolidation among property funds was between 2015 and 2017. But property investors are hungry for small, non-liquid companies to merge and become more attractive as investments.
But Fairvest Property Holdings remains one Reit that is pursuing a takeover of a peer, Arrowhead Properties.
Fairvest owns assets worth R3.5bn and has a market capitalisation of R1.7bn. It primarily invests in retail centres in rural areas and small towns.
Arrowhead, which was listed in 2011 by late property doyen Gerald Leissner, has a combined market capitalisation of R1.9bn across its A and B share structure. It owns a diversified portfolio of SA properties valued at R9.7bn.
A few months ago, Arrowhead’s largest investors approached Fairvest, asking it to become a shareholder of reference in the fund.
A shareholder of reference refers to a company’s largest shareholder.
Fairvest CEO Darren Wilder later said the company wanted to buy a 50.1% majority stake in Arrowhead. In June, an independent board endorsed the takeover.
Fund managers have also been in favour of a deal.
Paul Duncan, investment manager at Catalyst Alternative Investments, said Fairvest could acquire more of Arrowhead over time once it had bought this stake.
He said a merger between Fairvest and Arrowhead will lead to cost-saving synergies and create a fund with an attractive investment proposition.
“A combined company would firmly entrench itself as a mid-cap Reit with a market capitalisation of between R7bn and R8bn, with inclusion into the SA listed property index and the all property index at a significant level,” Duncan said.