Where fund man­agers are plac­ing prop­erty bets

Prop­erty share prices are likely to con­tinue to come un­der pres­sure, cre­at­ing buy­ing op­por­tu­ni­ties for in­come chasers. Joan Muller looks at where fund man­agers are plac­ing their bets

Financial Mail - Investors Monthly - - Front Page -

Listed prop­erty in­vestors have been on a roller coaster in re­cent weeks, with a num­ber of stocks dip­ping by more than 10% in May alone. Share price weak­ness has con­tin­ued into June.

The sell-down in prop­erty stocks has not been en­tirely un­ex­pected, given the sharp rally in the pre­ced­ing 12 months — the SA Listed Prop­erty in­dex (Sapy) notched up a to­tal re­turn (in­come and cap­i­tal growth) of 38% for the 12 months end­ing April, com­fort­ably ahead of the Alsi’s 18% over the same time. Prop­erty coun­ters, par­tic­u­larly the larger, more liq­uid coun­ters, have been boosted in re­cent months by, among oth­ers, the in­clu­sion in global real es­tate in­dices.

How­ever, an­a­lysts have in re­cent months re­peat­edly warned that the sec­tor is look­ing ex­pen­sive, par­tic­u­larly com­pared to bonds. In a re­port re­leased ear­lier this month, Ses­fik­ile Cap­i­tal di­rec­tor Evan Jankelowitz says it is time for ex­u­ber­ance to be re­placed by cau­tion.

“The yield pre­mium at which listed prop­erty was trad­ing vs that of bonds at the end of May — 6,5% against 7,95% — was not en­tirely jus­ti­fied. We be­lieve that the sec­ond half of the year will re­sult in global yields push­ing higher and a knee-jerk re­ac­tion to all in­come-bear­ing in­stru­ments.”

Jankelowitz ex­pects con­tin­ued short-term pres­sure on prop­erty share prices, which he says will cre­ate cheaper en­try points into the sec­tor over the com­ing months. Oth­ers voice a sim­i­lar sen­ti­ment, cau­tion­ing in­vestors to be­come pick­ier about stock se­lec­tion as the per­for­mance of in­di­vid­ual coun­ters be­comes in­creas­ingly di­ver­gent.

This is al­ready ev­i­dent from latest fig­ures re­leased by Cat­a­lyst Fund Man­agers. They show that the to­tal re­turn dif­fer­ence be­tween the best (Fortress B with 57%) and worst (Free­dom Prop­erty Fund with -47,5%) per­form­ing prop­erty stocks among the sec­tor’s 40-odd coun­ters is more than 100% for the year to date (Jan­uary-May). That com­pares to an av­er­age 7% to­tal re­turn for the R425bn sec­tor as a whole over the same five-month pe­riod (see ta­ble).

Most an­a­lysts still ex­pect prop­erty stocks to de­liver an av­er­age to­tal re­turn of 8%-12% over the next 12 months. Un­til now, the per­for­mance of in­di­vid­ual coun­ters has been driven to a large ex­tent by div­i­dend growth num­bers. For the year to date, most prop­erty com­pa­nies have de­clared bet­ter-than-ex­pected re­sults, with a num­ber of coun­ters grow­ing div­i­dends by more than 10%.

How­ever, Grindrod As­set Man­age­ment chief in­vest­ment of­fi­cer Ian An­der­son says dou­ble-digit div­i­dend growth will be­come in­creas­ingly scarce in the fu­ture. “Com­pa­nies that are be­ing priced to de­liver those lev­els con­sis­tently through time are likely to come un­der tremen­dous pres­sure in the months ahead. Es­pe­cially if both the US Fed­eral Re­serve and the SA Re­serve Bank start rais­ing in­ter­est rates in the sec­ond half of the year and Eskom is un­able to re­solve its elec­tric­ity sup­ply prob­lems.”

As a re­sult, Grindrod now favours prop­erty com­pa­nies that of­fer high ini­tial in­come (or div­i­dend) yields, al­beit with slightly more mod­est longer term growth ex­pec­ta­tions. An­der­son’s top value picks are Delta Prop­erty Fund (of­fices with gov­ern­ment as ten­ants), trad­ing at an at­trac­tive 10,8% for­ward yield, of­fice-fo­cused Tex­ton Prop­erty Fund, which of­fers a 9,8% for­ward yield, and Western Cape-bi­ased small cap Tower Prop­erty Fund, which in­vestors can buy at a 9,7% for­ward yield.

An­der­son points out that none of these com­pa­nies has been in­cluded in global in­dices yet, so their share prices haven’t ben­e­fited from in­creased off­shore de­mand in re­cent months like those of many larger coun­ters.

“All three com­pa­nies of­fer sig­nif­i­cant growth through re­de­vel­op­ment and ac­qui­si­tion

An­a­lysts have in re­cent months re­peat­edly warned that the sec­tor is look­ing ex­pen­sive

op­por­tu­ni­ties, de­spite the de­te­ri­o­rat­ing eco­nomic back­drop and ris­ing cost of cap­i­tal.”

Nesi Chetty, head of prop­erty at Mo­men­tum As­set Man­age­ment, sin­gles out blue chip mall owner Hyprop In­vest­ments, New Europe Prop­erty In­vest­ments (Nepi) and Emira Prop­erty Fund as his top three picks.

He says Hyprop has a qual­ity port­fo­lio of tier-one shop­ping cen­tres, which tend to be more de­fen­sive than smaller, sec­ondary cen­tres through a down cy­cle. In­come growth will be boosted over the com­ing year by Hyprop’s Rose­bank Mall in Johannesburg, which was re­cently re­fur­bished and ex­panded. “Very low va­can­cies across the port­fo­lio mean that the group can pick and choose the best pos­si­ble ten­ants for new let­tings.”

Chetty ex­pects Nepi to con­tinue to de­liver div­i­dend growth of 14%-15% for the com­ing fi­nan­cial year. “The com­pany’s track record of dis­tri­bu­tion growth has been im­pres­sive — around 12% com­pounded since 2008. This de­spite the global fi­nan­cial cri­sis and sub­se­quent re­ces­sion as well as low and de­clin­ing gear­ing of only 11%.’’

Prospects for growth in Ro­ma­nia, where Nepi fo­cuses, look good as the coun­try is still un­der­sup­plied in re­tail space rel­a­tive to its size and in­come. “De­spite marginally higher GDP per capita and re­tail sales per capita than SA, Ro­ma­nia has only one-third of SA’s shop­ping cen­tre space per capita.”

Chetty says Emira, which was out of favour for some time due to the com­pany’s over­ex­po­sure to the strug­gling sec­ondary of­fice mar­ket, has staged an im­pres­sive turn­around. “Man­age­ment has sold off un­der­per­form­ing as­sets and ex­e­cuted on yield en­hanc­ing ac­qui­si­tions and re­fur­bish­ments. Strong rental growth and lower va­can­cies across the port­fo­lio bode well for fu­ture net as­set value up­lifts. We ex­pect to see strong div­i­dend growth and fu­ture ac­qui­si­tions to bulk up the as­set base.”

Mau­rice Shapiro, co-founder of Ma’Alot In­vest­ments, ranks the Wap­nick fam­ily’s Oc­todec In­vest­ments (which last year merged with sis­ter fund Pre­mium Prop­er­ties), sec­tor heavy­weight Re­de­fine Prop­er­ties and Vuk­ile Prop­erty Fund as his top buys.

Oc­todec’s fo­cus on of­fice to flat con­ver­sions in the in­ner cities of Pre­to­ria and Johannesburg will drive con­sis­tent in­come growth over the next 3-5 years as the ur­ban­i­sa­tion trend con­tin­ues.

Shapiro says Re­de­fine is an at­trac­tive re­cov­ery play. He be­lieves the dis­count at which the stock still trades rel­a­tive to peer Growth­point Prop­er­ties is not en­tirely jus­ti­fied. “Man­age­ment has over the past five years suc­cess­fully mod­ernised the un­der­ly­ing prop­erty port­fo­lio through re­de­vel­op­ments, ac­qui­si­tions and dis­pos­als. The com­pany has also re­struc­tured its off­shore of­fer­ing and plans to in­crease ex­po­sure to rand-hedge op­por­tu­ni­ties.”

Vuk­ile, which owns a num­ber of town­ship and ru­ral shop­ping cen­tres and a 50% stake in the East Rand Mall in Boks­burg, also of­fers value at cur­rent lev­els. Says Shapiro: “Vuk­ile has an ex­cep­tion­ally com­pe­tent man­age­ment team that knows how to sweat its as­sets. The fund has clev­erly re­struc­tured its gov­ern­ment-ten­anted of­fice port­fo­lio while si­mul­ta­ne­ously im­prov­ing its black eco­nomic em­pow­er­ment (BEE) rat­ing.”

An­a­lysts agree that a key theme into the fu­ture will be in­vestors’ search for rand-hedge op­por­tu­ni­ties. Howard Penny of RMB Mor­gan Stan­ley says de­spite a strong share price per­for­mance from many of the JSE’s pure off­shore prop­erty plays in re­cent years, rand-hedge coun­ters still stand out as rel­a­tively at­trac­tive buys within the larger sec­tor.

These in­clude the likes of Lon­don-fo­cused Cap­i­tal & Coun­ties Prop­er­ties, UK mall owner Intu Prop­er­ties, Nepi and sis­ter fund Rock­cas­tle Global Real Es­tate Com­pany, Western Euro­pean-fo­cused Re­de­fine In­ter­na­tional, MAS Real Es­tate and Sten­prop, as well as Investec Aus­tralia Prop­erty Fund.

“Real earn­ings growth, greater rel­a­tive yield com­pared to SA’s bond bench­mark and lower in­ter­est rates are key ad­van­tages of­fered by off­shore real es­tate mar­kets. This, to­gether with pock­ets of over­sup­ply in SA rel­a­tive to a more muted de­mand growth tra­jec­tory, still point to greater po­ten­tial re­turns from off­shore prop­erty stocks rel­a­tive to purely SA-fo­cused coun­ters.”

Penny says the bet­ter re­turns on of­fer off­shore have prompted play­ers such as Growth­point, Re­de­fine, the Re­silient group, At­tacq and Hyprop to ex­pand their port­fo­lios be­yond SA.

In fact, Penny notes that dol­lar (US and Aus­tralian), pound and euro rev­enue as a per­cent­age of to­tal earn­ings for the sec­tor has surged from as lit­tle as 2% in 2010 to over 22% in 2014.


Evan Jankelowitz … It is time for ex­u­ber­ance to be re­placed by cau­tion.


Ian An­der­son … Dou­ble-digit div­i­dend growth will be­come in­creas­ingly scarce in the fu­ture.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.