Buy offshore with caution
Some rand hedge real estate counters are trading at attractive discounts but investors shouldn’t expect values to recover any time soon, writes Joan Muller
I t wasn’t that long ago that London real estate play Capital & Counties Properties (Capco), owner of trendy mixed-use precinct Covent Garden, was on just about every South African fund manager’s buying list.
In 2015 Capco surged 57%, placing it among one of the JSE’s top-performing stocks for that year. Romanian-focused New Europe Property Investments (Nepi) and Tradehold, the UK and African property company in which retail tycoon Christo Wiese has a majority stake, had notched up equally impressive runs in 2015.
But last year there was a sharp reversal in the fortunes of offshore property stocks on the back of a stronger rand and Brexit jitters. This happened both before and after the UK’s decision to exit the EU. The British pound lost 35.6% against the rand last year.
Unsurprisingly, counters exposed to the UK were hardest hit. By end 2016, Capco had tumbled more than 50% from its 2015 highs. Other UK-biased stocks, such as Capital & Regional, Intu Properties, Redefine International, Atlantic Leaf Properties and Stenprop, shed more than 30% of their value in 2016. Counters exposed to Europe, including Nepi, Schroders Real Estate Investment Trust, MAS Real Estate and Sirius Real Estate were not left entirely unscathed.
Out of about 20 JSE-listed property offerings that generate 100% of their earnings in pounds, euros or US or Australian dollars, only four rand hedge property counters — Rockcastle, Greenbay, Africanfocused Mara Delta and Investec Australia Property Fund — managed to deliver a positive return to shareholders last year (see graph). But not even top performer Investec Australia Property Fund, which boasts a 12% total return, came close to the 30%-plus achieved by South African-based property counters such as industrial-focused Equites Property Fund, SA Corporate Real Estate Fund, Dipula Income Fund, Rebosis Properties and Delta Property Fund.
The key question is whether now is a good time to buy rand hedge property stocks at seemingly bargain basement prices, particularly given that the rand is looking relatively strong. More importantly, which individual counters offer the best potential returns?
Analysts are not convinced that JSE-listed offshore property stocks will stage a comeback over the next 12 months. Bridge Fund Managers chief investment officer Ian Anderson says investors are likely to continue making more money this year in their own backyards than offshore. “Unless the rand weakens sharply, and that’s anyone’s call,” he says.
Anderson says the tailwinds that have supported global listed real estate over the past three years, such as low interest rates, low bond yields and low inflation, have turned into substantial headwinds. “In addition, the global political climate has become uncertain, particularly in Europe.”
However, there is value to be had for investors that are prepared to take a two- to three-year view. Anderson says the trick is to buy stocks that offer good underlying businesses, are strong operators in niche markets and are trading at sizable discounts to net asset value (NAV). He singles out Hammerson, German-focused Sirius and MAS. “All three offer the right business proposition at the right price.” He says if you have a shorter investment horizon, rather reduce your risk by diluting your offshore exposure through South African-based counters that have only a portion of their portfolios in other countries.
Anderson’s preferred entry points in this regard are Tower Property Fund, which has built a R1.3bn presence in Croatia over the past 18 months; Accelerate Property Fund, which recently entered Austria; and Equites. The last-mentioned now owns three logistic warehouses in the UK on long lease contracts with, among others, Amazon and Tesco. “Equites has a solid South African strategy but also offers upside through its UK exposure. Management cut its teeth in UK real estate so has extensive knowledge of that market.”
Sesfikile Capital director Kundayi Munzara agrees that the outlook for the UK and Europe remains turbulent given uncertainty about the timing of the UK’s exit of the EU and looming elections in France, Netherlands and Germany. “Besides, not every offshore property counter offers value at current levels despite recent pressure on share prices.”
Munzara refers to Nepi and Rockcastle, among others, which he says are still trading at steep premiums to NAV of about 100% and 54% respectively. He says Nepi has a
Once completed, current development projects in locations such as Edinburgh will add further income-generating assets to the portfolio at better yields
strong development pipeline, imbedded rental upside and potential cap rate compression that could perhaps justify a lot of this premium. “However, if you compare these premiums with Intu Properties and Hammerson, which are trading at around a 30% and 20% discount to net asset value respectively, it’s clear that the differential in valuations may not be sustainable.”
Munzara says Sesfikile’s top JSE-listed offshore pick for 2017 is Investec Australia Property Fund. Not only is Australia now one of the most stable regions in the world, both economically and politically, the company has a simple business model that’s easy to understand, with a strong asset management team on the ground. “We place high value on local teams with local knowledge.”
Sesfikile also likes Investec Australia Property Fund’s strategy to buy office and industrial buildings in secondary nodes on the fringes of major cities such as Brisbane, Melbourne and Sydney. “You can still buy quality stock on the outskirts of Sydney at yields of about 7.5% and secure debt funding at around 4%. That’s attractive, considering that Sydney is arguably one of the world’s strongest office markets now.”
However, Munzara argues that for retail investors it probably makes more sense to access offshore property markets through a diversified unit trust fund than buying into individual JSE-listed offshore property stocks. “The last-mentioned tend to be exposed mainly to the UK and Central and Eastern Europe, with barely any US exposure. And to limit yourself to one region in the current uncertain political and economic climate can be risky, ” Munzara says.
Metope Investment Managers CEO Liliane Barnard says that in the current period of currency volatility the company prefers offshore stocks that offer strong growth prospects in hard currency.
She singles out MAS as Metope’s top pick for 2017. “MAS provides investors with exposure to the developed markets of the UK and Western Europe, including Germany and Switzerland, as well as the emerging CEE region through a 40% stake in Prime Kapital.”
Prime Kapital was founded by Martin Slabbert and Victor Semionov, who built up a strong development track record in the region during their tenure as former CEO and financial director of Nepi.
Barnard says MAS is able to execute on its strategy of growing and sustaining dividend payouts through a highquality portfolio of development assets as well as existing, income-generating properties. “Once completed, current development projects in key locations such as Edinburgh will add further income-generating assets to the portfolio at better yields than MAS is likely to achieve if it had to buy properties in the open market,” Barnard says.
Keillen Ndlovu, head of listed property funds at Stanlib, also favours MAS, as well as Hammerson. “MAS is expecting high double-digit growth for the next two to three years. To achieve this, management is willing to sacrifice salaries and bonuses for the next five years or so through a proposed deferred remuneration scheme,” Ndlovu says.
Hammerson, whose shopping centre portfolio has a 60% exposure to the UK and a 40% exposure to Europe, mostly through France, the Netherlands and Spain, also offers an attractive buying opportunity at current levels
. “Hammerson has a great portfolio and management team and good earnings growth outlook, and it is trading at a discount to NAV,” Ndlovu says.
He says there is no doubt that rand hedge property stocks now offer better value than 12 to 18 months ago. “But investors will have to become far more discerning in their stock selection than before. The days of using a shotgun approach are over.”
Kundayi Munzara … not every offshore property counter offers value
Keillen Ndlovu …investors have to be discerning
TOTAL RETURNS COMPARED (2016) Offshore property counters Local property counters Indices *New offshore listings SOURCE: Bloomberg & Sesfikile Capital