FUND RE­VIEWS

Financial Mail - Investors Monthly - - Con­tents - Stephen Cranston

Absa Prop­erty Eq­uity Fund, Ned­group In­vest­ments Prop­erty Fund, Cat­a­lyst SA Prop­erty Fund, Old Mu­tual SA Quoted Prop­erty Fund, Ses­fik­ile BCI Prop­erty Fund

T he spe­cial­ist prop­erty funds had mod­est be­gin­nings in 1996, when Mar­riot, a niche Dur­ban-based man­ager, launched its prop­erty fund as a collective in­vest­ment.

At the time there was con­fu­sion be­tween it and the listed ve­hi­cles also known as prop­erty unit trusts (but now, to re­duce con­fu­sion, called real es­tate in­vest­ment trusts). Some even con­fused these new prod­ucts with prop­erty syn­di­ca­tions, which had been the eas­i­est way for pri­vate in­vestors to get ex­po­sure to the prop­erty sec­tor, though usu­ally to a sin­gle prop­erty such as a mid-sized shop­ping cen­tre.

Prop­erty was out of favour at the time, and the sec­tor had a lim­ited se­lec­tion of shares. Yet any early adopter of these prop­erty eq­uity funds would have done very well.

Ac­cord­ing to the Old Mu­tual Long-Term Per­spec­tives doc­u­ment there was a neg­a­tive 7.8% real re­turn from listed prop­erty from 1983 to 1998; but since 2002 the re­turn was an as­ton­ish­ing 15.4%. Of course, this rerat­ing can­not go on in­def­i­nitely. But prop­erty has many of the best char­ac­ter­is­tics of eq­ui­ties and bonds, and is an in­fla­tion hedge, as there are built-in es­ca­la­tions of about 8% in al­most all rental agree­ments.

Prop­erty funds ac­count for 4% of the unit trust in­dus­try’s as­sets, or R71.9bn, which is higher than the R53.3bn in­vested in bond funds.

And it is in­ter­est­ing to com­pare the suc­cess of the fad sec­tors of the late 1990s: the tech­nol­ogy fund sec­tor has been dis­banded, the small cap sec­tor limps only, but prop­erty is now 10 times big­ger than small cap while in­dus­trial and fi­nan­cial funds are smaller still.

In the early years prop­erty was a sim­ple, rand-based yield play, and there was a con­certed ef­fort to build large lo­cal busi­nesses through merg­ers and takeovers such as Growth­point and Hyprop. In­vestors liked the re­tail fo­cus in view of the high pro­file of the as­sets and their re­li­able ten­ant mix. Hyprop grew from Hyde Park Cor­ner in Sand­ton to larger cen­tres such as Cape Town’s Canal Walk, The Glen, south of Jo’burg, and Clear­wa­ter, north­west of Sand­ton.

There is a fur­ther high-qual­ity op­tion now that Lib­erty Two De­grees has been listed. Its core is the su­per-re­gion­als, Sand­ton City and East­gate. And there could be still fur­ther sup­ply of lo­cal list­ings if, for ex­am­ple, Old Mu­tual lists part of its port­fo­lio or one of the more se­cre­tive pri­vate in­vestors, such as Zen­prop, does so.

But the sec­tor now has a sub­stan­tial in­ter­na­tional com­po­nent. For the past 20 years, a very large prop­erty busi­ness has been listed on the JSE: Lib­erty In­ter­na­tional, which later split into two busi­nesses — Intu, a lot like a British ver­sion of Hyprop, and Cap­i­tal & Coun­ties, which is more of a cap­i­tal play than an in­come pro­ducer.

These shares never formed part of the SA Prop­erty In­dex. But more re­cent in­ter­na­tional list­ings do. The largest and most high pro­file of these is New Eu­rope Prop­erty In­vest­ments, which has its as­set base in Ro­ma­nia yet is still con­sid­ered a “do­mes­tic” share.

The other trend has been for in­ter­na­tional prop­erty busi­nesses with no pre­vi­ous con- nec­tion to SA to list on the JSE An ex­am­ple is Ham­mer­son, Intu’s main ri­val in UK shop­ping cen­tres. When all these funds are taken to­gether, the off­shore com­po­nent of the JSE prop­erty sec­tor is as high at 58%. It would be higher, ex­cept that the UK-based busi­nesses have traded well be­low their his­toric highs since Brexit.

So there has been eupho­ria around the prop­erty sec­tor.

What do prospec­tive in­vestors need to know be­fore in­vest­ing in these funds? An­ton de Goede, man­ager of the Corona­tion Prop­erty Fund (which was an­a­lysed in IM last year) says there is some over­sup­ply in of­fice space as cor­po­rates such as Sa­sol and Dis­cov­ery, as well as le­gal firms such as ENS and Web­ber Wentzel, re­lo­cate to new head of­fices in Sand­ton and the ten­ant pool does not in­crease.

The re­tail sec­tor could also be soft, as it is es­ti­mated that 100 malls have come on stream in re­cent years.

Cu­ri­ously, in­dus­trial prop­erty has been the most ro­bust, even though bar­ri­ers to en­try are low as it is much eas­ier to build ware­houses than other prop­er­ties.

The largest and most high pro­file of these is New Eu­rope Prop­erty In­vest­ments, which has its as­set base in Ro­ma­nia yet is still con­sid­ered a ‘do­mes­tic’ share

T his fund has been given five stars by Morn­ingstar. It has run with a suc­cess­ful blend of large and mid caps. Fund man­ager Fayyaz Mot­tiar has been an early adopter of Green­bay, which has in­vested in Por­tuguese shop­ping cen­tres, but he also has some old warhorses in his fund such as Hyprop, Re­silient, Vuk­ile and SA Cor­po­rate. It is also a large holder of in­ter­na­tional prop­erty shares such as Echo Pol­ska Prop­er­ties (EPP) and Ro­ma­ni­an­based New Eu­rope Prop­erty In­vest­ments (Nepi) and the mainly Ger­man MAS Real Es­tate. He also likes Sir­ius, an­other Ger­man play, as it has some re­li­able ten­ants of its in­dus­trial parks such as sub­con­trac­tors to Air­bus.

Other favourites in­clude Fortress B and Ar­row­head. Mot­tiar says the fund is higher risk than tra­di­tional fixed in­come funds, but is ideal for medium to long-term in­vestors. He says in­vestors need to choose whether to take a pas­sive or an ac­tive ap­proach and the fund is def­i­nitely in the ac­tive camp, tak­ing no in­ter­est in mea­sur­ing its track­ing er­ror against the in­dex.

It looks for asym­met­ric re­turns when the pric­ing and struc­ture is wrong. So the fund has not tended to hold Growth­point but af­ter the Nenegate affair in De­cem­ber 2015 it piled in and sub­se­quently sold. Listed prop­erty has given a 14,3% re­turn over the past 10 years ahead of eq­ui­ties (9.8%), bonds (8.1%) and cash (7.3%).

But he says there is dis­par­ity be­tween the dif­fer­ent prop­erty coun­ters. Growth­point re­cently re­ported dis­tri­bu­tion growth of 6.1%, Fortress B 25.1% and Nepi 14.6%. There are in­creas­ing con­cerns about of­fice and even re­tail va­can­cies, though he says re­tail lead­ers such as Re­silient and Hyprop still en­joyed growth above 16%.

There con­tin­ues to be new money flow­ing into the sec­tor. Mot­tiar was an en­thu­si­as­tic backer of a Green­bay R2bn book build and to a lesser ex­tent MAS Hold­ings’ R1,75bn call. Mot­tiar only be­lieves in in­vest­ing in prop­erty shares which can give a re­turn higher than cash.

Un­like its com­peti­tors, the fund takes chunky cash hold­ings, which have been as high as 23% of the fund and which even now are rel­a­tively high at 8.5%. M an­aged by Bridge Fund Man­agers (pre­vi­ously Grindrod) this is the “least bench­mark” of the five funds re­viewed.

There is no Growth­point, Re­de­fine or Re­silient in the fund. Fund man­ager Ian An­der­son still thinks like a small fund man­ager — even though, at R3bn, the fund is one of the largest in the sec­tor.

He is not as con­cerned as his peers about the liq­uid­ity of the shares in which he in­vests. He has chunky hold­ings, ac­count­ing for more than 9% of the fund each in five shares, none of which would be among the aris­toc­racy of prop­erty funds. The largest is Re­bo­sis, fol­lowed by Ar­row­head, Delta, Ac­cel­er­ate and Tower.

He says the fund con­tin­ues to in­vest in these small and mid­sized funds. As the large funds tend to fo­cus on re­tail, Ned­group is sig­nif­i­cantly un­der­weight in re­tail and over­weight in of­fice and res­i­den­tial. Though they have per­formed well over the past 12 months, he says the smaller com­pa­nies con­tinue to trade at dis­counts to net as­set value, mainly be­cause they lack in­sti­tu­tional sup­port.

It is eas­ier for a fund to man­age and ad­min­is­ter fewer prop­er­ties, and any ac­qui­si­tions, re­de­vel­op­ments or dis­pos­als are more mean­ing­ful to the bot­tom line. They also tend to spe­cialise in a spe­cific class of prop­erty or ge­o­graphic re­gion.

An­der­son says the fund has three aims: a high level of cur­rent in­come, in­fla­tion­hedged in­come growth and long-term cap­i­tal ap­pre­ci­a­tion. A share such as Cap­i­tal & Coun­ties, owner of Covent Gar­den in the UK, may well of­fer the prospect of longterm cap­i­tal ap­pre­ci­a­tion, and even in­fla­tion-hedged in­come, but it is never likely to of­fer high cur­rent in­come. Mainly be­cause of lower yields abroad, the fund has an 88% weight­ing to SA com­pared with 64% in the prop­erty in­dex.

There are a few op­por­tunis­tic pur­chases such as MAS Real Es­tate, which in­vests in re­tail and in­dus­trial prop­erty across Eu­rope but mainly in Ger­many. There has also been a small po­si­tion in Africa-based Mara Delta, which has a large ex­po­sure to ho­tels in Mau­ri­tius. An­der­son doesn’t like the sec­tor but is pre­pared to tone down his scep­ti­cism as it is a well-man­aged port­fo­lio.

An­der­son is dis­ap­pointed that there has been only a lim­ited move to­wards spe­cial­i­sa­tion.

He is con­cerned, for ex­am­ple, that over the next few years shop­ping cen­tres feel pres­sure from the growth of on­line sales: it is al­ready mak­ing a vis­i­ble im­pact on in­ter­na­tional re­tail­ers such as Westfield and Si­mon Prop­erty Group.

An­der­son says the ini­tial in­come yield of the fund is 9.8% with an­nual growth of 7.5% over three years. So it should hand­somely out­per­form the for­ward yield on the SAPY in­dex of 7.2% He says the fund will be capped as soon it reaches 1% of the mar­ket cap­i­tal­i­sa­tion of the SA listed prop­erty sec­tor. Bridge, as a man­ager, will cap its en­tire as­set base at 5% of the sec­tor. A long with Ses­fik­ile, Cat­a­lyst is a lead­ing listed prop­erty spe­cial­ist man­ager. Its SA prop­erty fund aims to achieve a 13%-15% re­turn over an an­nual cy­cle. Se­nior port­fo­lio man­ager Paul Dun­can says that the busi­ness’s re­search is fo­cused on two ar­eas. These are trends af­fect­ing cap­i­tal mar­kets con­cern­ing real es­tate pric­ing, yields and fund­ing costs, as well as trends af­fect­ing real es­tate mar­kets con­cern­ing va­cancy fore­casts, changes in mar­ket rentals, con­trac­tual rental es­ca­la­tion rates and op­er­at­ing cost in­creases.

Per­haps even more im­por­tant is the in­depth com­pany anal­y­sis, look­ing at the qual­ity of the real es­tate at each listed com­pany, its risk-re­turn pro­file, the cap­i­tal struc­ture and the qual­ity of man­age­ment.

The fund had a bias to­wards in­ter­na­tional shares in 2015 and 2016, which has cer­tainly been changed. In its top 10 only Sir­ius Real Es­tate and In­vestec Aus­tralia would be con­sid­ered fully in­ter­na­tional, though lately Re­silient, and more re­cently

Re­de­fine and Tex­ton, have ac­quired in­ter­na­tional as­sets.

The fund has not been shy to in­vest in At­tacq, a de­vel­oper which that pays vir­tu­ally no div­i­dends but which has sub­stan­tially bet­ter prospects for cap­i­tal growth than most prop­erty shares.

Cat­a­lyst Fund man­ager Zayd Su­laiman says the port­fo­lio will dif­fer from the SA prop­erty in­dex as the in­dex is 36% for­eign, and this por­tion is volatile, since it is heav­ily in­flu­enced by the rand. Lo­cal cur­rency down­grades can only make it worse.

Su­laiman says the fund fo­cuses on com­pa­nies with qual­ity in­come streams and es­pe­cially on man­age­ment that does not just sit on its hands but con­tin­ues to re­cy­cle cap­i­tal.

He is con­cerned that the sec­tor is a lot less vanilla, with in­come hedges and un­re­alised gains dis­tort­ing dis­tri­bu­tions. T he fund has a rather long name to dis­tin­guish it­self from the di­rect Old Mu­tual Prop­erty busi­ness that owns the Rose­bank Zone in Jo­han­nes­burg and Cavendish Square in Cape Town.

Fund man­ager Evan Robins is em­bed­ded in the MacroSo­lu­tions “bou­tique”, so his main job is run­ning the prop­erty com­po­nent of bal­anced funds. He says, how­ever, that the ded­i­cated prop­erty unit trust is much more di­ver­si­fied. The bal­anced funds have dif­fer­ent buck­ets for lo­cal and pre­dom­i­nantly in­ter­na­tional shares, while the unit trust in­cludes both, and the blend is at the fund man­ager’s dis­cre­tion.

It has the hold­ings to be ex­pected in a bench­mark-aware fund, with a few large play­ers — 22% of the fund is in­vested in Growth­point, even though Robins ad­mits he is “not very ex­cited” about it. The other three hold­ings ac­count­ing for more than 7% each are Re­de­fine, Hyprop and Vuk­ile.

The fund lives up to its SA tag, as there are only two in­ter­na­tion­ally fo­cused shares. Ro­ma­nia-based New Eu­rope Prop­erty In­vest­ments at 4.1% is sig­nif­i­cantly be­low bench­mark weight­ing; the much smaller Sir­ius, which runs busi­ness parks in Ger­many, is 3.8% of the fund.

Robins says the fund has out­per­formed the in­dex over the past 12 months be­cause of its bias to­wards do­mes­tic shares. Even if in­ter­na­tional shares im­prove as the rand weak­ens, he says the fund will con­tinue to hold mean­ing­ful po­si­tions in prop­erty shares that of­fer the most long-term value.

He feels he can­not ig­nore the most liq­uid shares, as the cost of get­ting in and out is much lower than it would be buy­ing and sell­ing illiq­uid shares.

Robins says that though the mar­ket is slug­gish, only one lo­cal fund re­ported div­i­dend growth of less than 6%. But growth in net as­set value is anaemic. He ad­mits many peo­ple may be put off prop­erty be­cause the yield on the in­dex is 7.5%, when you can get 9% from the 10-year bond. But re­cov­ery in the sec­tor is still a long way off, he says, with poor GDP growth, cost in­creases con­tain­ing net rental growth, and un­cer­tainty on re­newal rentals with sig­nif­i­cant new sup­ply com­ing on board, es­pe­cially in of­fices. T his bil­lion-rand fund is the most bench­mark-cog­nisant fund we are re­view­ing, per­haps along­side Old Mu­tual. You would have to look the Pru­den­tial en­hanced prop­erty in­dex fund to find a closer repli­ca­tion.

The largest hold­ings are Growth­point, Re­de­fine, New Eu­rope Prop­erty In­vest­ments, Re­silient and Hyprop, all in their dif­fer­ent ways the blue chips of the sec­tor. Fortress B, Vuk­ile, Ar­row­head, Fortress A and SA Cor­po­rate round out the top 10.

It cer­tainly doesn’t sell it­self as a closet in­dex man­ager — the manag­ing troika of Mo­hamed Kalla, Kun­dayi Mun­zara and Evan Jankelowitz were all schooled in large houses and had the op­tions to run higher-pro­file funds be­fore.

Jankelowitz says Ses­fik­ile is com­mit­ted to cap­ping the size of the fund to en­sure that there will still be an op­por­tu­nity to out­per­form the prop­erty in­dex. It is likely to fol­low the more com­pre­hen­sive all­prop­erty in­dex. This will in­clude Cap­i­tal & Coun­ties and Intu, which pre­vi­ously made up Lib­erty In­ter­na­tional, as well as just as a slither of UK-based Ham­mer­son, where the SA share­hold­ing is still quite small.

Jankelowitz says that to date the fund has been able to de­liver low-risk out­per­for­mance of the bench­mark even on an af­ter-fees ba­sis, of 2,7%/year. But he says this will get tougher: 1,4% out­per­for­mance would be con­sid­ered sat­is­fac­tory in cur­rent mar­kets. And its fees are higher than av­er­age, with a to­tal cost of 1.65%. He says that with a for­ward yield of 7.6% growth ex­pected just ahead of 8% val­u­a­tions still ap­pear at­trac­tive, though this could be de­railed if fis­cal re­straint is thrown out.

Be­cause of these risks Ses­fik­ile does not chase high yields for the sake of it, al­ways fo­cus­ing on the qual­ity and sus­tain­abil­ity of earn­ings — and there is a spe­cial need to be cau­tious in the in­ter­na­tional shares, in which the lo­cal fund man­agers are less fa­mil­iar. Lo­cally there is se­ri­ous dan­ger of ex­cess re­tail space, with the ex­panded Men­lyn in Pre­to­ria and Four­ways Mall com­ing on line.

Ses­fik­ile takes a dif­fer­ent view from, say, Absa, on cash.

Jankelowitz says he as­sumes clients have al­ready made an as­set al­lo­ca­tion de­ci­sion to in­vest in prop­erty, so the fund will not go above 5% cash.

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