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.