No longer an ideal hedge

Financial Mail - Investors Monthly - - Feature: Offshore Investing -

Af­ter a stellar run over the past few years and rand hedge sta­tus, global prop­erty is looking a lit­tle less at­trac­tive than only a few months ago, writes Jo­hann Barnard. This is due to Brexit putting the skids un­der the hugely pop­u­lar UK prop­erty mar­ket, and rand strength, which has eroded the hedg­ing op­por­tu­nity.

Ac­cord­ing to global real es­tate firm CBRE, cap­i­tal values for of­fices in the City of Lon­don dropped 6.1% in July from the pre­vi­ous month, fol­low­ing the Brexit de­ci­sion. Values for the rest of the UK dropped by 4.1%.

With such early signs of dis­tress emerg­ing in one of South African in­vestors’ most pop­u­lar off­shore prop­erty des­ti­na­tions, how do in­vest­ment man­agers view the fu­ture?

Greg Hop­kins, chief in­vest­ment of­fi­cer at PSG As­set Man­age­ment, is scep­ti­cal about global prop­erty.

“We are gen­er­ally cau­tious about both global and do­mes­tic prop­erty.

“We con­tinue to think that un­der­ly­ing net as­set values, which are struck at the es­ti­mated mar­ket values of the un­der­ly­ing prop­er­ties, are high,” he says.

“Some of the rental as­sump­tions and rental yields ap­pear overly op­ti­mistic and the dis­count rate that the val­u­a­tions are based on ap­pear too low. Share prices are trad­ing close to un­der­ly­ing net as­set values, and as a re­sult we feel the un­der­ly­ing shares don’t have a suf­fi­cient mar­gin of safety for us to in­vest.”

Hop­kins says this view is based on rental prices in cer­tain seg­ments in the mar­ket — par­tic­u­larly of­fice rentals — start­ing to ap­proach the his­toric highs of 2007. This is com­pounded by new sup­ply com­ing into the mar­ket that could po­ten­tially lead to over­sup­ply if va­can­cies rise from quite low lev­els.

The dan­ger, Hop­kins cau­tions, is com­pounded by the gear­ing lev­els of these prop­er­ties — the debt in­curred to buy or build them. The prop­erty coun­ters are ex­posed to this debt and could be at greater down­side risk if the trend of fall­ing prop­erty values con­tin­ues. There is the pos­si­bil­ity then of the share val­u­a­tions fall­ing be­low the un­der­ly­ing prop­erty value.

“One of the rea­sons global prop­erty has been pop­u­lar is that its div­i­dend yields are often above lo­cal gov­ern­ment bond yields.

“These bond yields are, how­ever, at gen­er­a­tional lows — and if bond yields nor­malise it could have a sig­nif­i­cant ef­fect on prop­erty val­u­a­tions and sub­se­quent share prices,” Hop­kins adds.

In­vestors should bear these warn­ings in mind; how­ever, it is also true that there is no short­age of choice for South Africans.

Not only has the pop­u­lar­ity of off­shore prop­erty given rise to nu­mer­ous funds play­ing in that mar­ket, but di­rect ex­po­sure is also pos­si­ble through JSE list­ings of ex­ter­nally fo­cused prop­erty coun­ters. In the past month alone, the list­ing on the JSE of three new off­shore prop­erty com­pa­nies has been an­nounced. These in­clude Poland-fo­cused GTC Group and Echo Pol­ska Prop­er­ties (EPP), and UK shop­ping mall de­vel­oper Ham­mer­son.

Stephen Mein­t­jes of Mo­men­tum SP Reid Se­cu­ri­ties says that while the greater choice is good news for in­vestors, cau­tion is ad­vised. This is due to the strong run that prop­erty has had, and de­spite the yield on Reits (real es­tate in­vest­ment trusts) re­main­ing at­trac­tive.

Dave Christie of Ash­bur­ton In­vest­ments says the in­vest­ment house has also had a pref­er­ence for Reits as a way to gain ex­po­sure to prop­erty, though to a lim­ited de­gree.

“We do think they are a lit­tle over­priced at the mo­ment, so we are also avoid­ing prop­erty as we think there is prob­a­bly some dirty wash­ing to come out and there are liq­uid­ity is­sues,” he says.

The de­ci­sion for in­vestors want­ing to gain ex­po­sure to global prop­erty is, as in the case of other as­set classes, not an easy one. There may be greater op­por­tu­nity, as the rand is stronger, but re­turns and risk are not as favourable as they were a few short months ago.

Left: Of­fice rentals are start­ing to ap­proach the his­toric highs that were seen in 2007. Pic­ture: iS­TOCK Be­low: Greg Hop­kins, chief in­vest­ment of­fi­cer at PSG As­set Man­age­ment.

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