Back on the radar and doing rather well

Investec Property Fund’s (IPF) share price hasn’t exactly shot the lights out in recent years. In the two years to July 12 the stock is down about 6%. But the counter has probably been overly punished following the dilutive R7.1bn Zenprop deal that was announced in late 2015.

The transaction, one of the largest concluded by a listed property fund in 2015-2016, nearly doubled IPF’s portfolio at the time, taking total assets from R8.7bn to R17bn. Another transaction that provided further scale was the Griffin deal in 2015, which comprised 22 properties, mostly industrial buildings, from Griffin Holdings for R826m.

Though the R7.1bn acquisition from Zenprop was regarded as a coup for IPF, as it bulked up the fund’s portfolio with a number of quality shopping centres and office blocks, shareholders were not overjoyed that it was going to place a damper, albeit temporary, on dividend growth. The latter slowed from 6.1% for the year ended March 2016 to 2.4% for the year ended March 2017.

IPF may also have lost some favour because it hasn’t grown its offshore footprint as aggressively as some of its peers. The fund’s only offshore exposure is to the Australian property market via a R1.3bn stake in sister company Investec Australia Property Fund, which amounts to close to 6% of total assets of R18.8bn. That compares to an average 15%-30% foreign exposure offered by many other SA-based property stocks. In addition, IPF is externally managed by Investec Property, whereas investors nowadays prefer property funds to be internally managed.

IPF is likely to start reappearing on investor radars now that the dilutionary impact of the Zenprop acquisition has been absorbed. At its recent annual results presentation, management said the fund would revert to its historical 7%-8% dividend growth for the year ending March 2018. Moreover, IPF is now trading at an attractive discount to the sector given a forward yield of close to 9% versus the sector’s average 7.5%.

The fund’s underlying portfolio is also performing well. Jay Padayatchi, director of Meago Asset Managers, says for IPF to have achieved 8.7% growth in net property income for the year ended March in the challenging environment is impressive. Cost-to-income ratios continue to improve: to 15.2% from 16.1% a year earlier. In addition, IPF’s portfolio vacancy of 1.4% is also among the lowest in the sector. “These numbers underscore the quality of the portfolio and the expertise of the management team,” says Padayatchi.

IPF’s measured approach to offshore expansion may also turn out to be a blessing as there is a view that some funds are entering offshore markets too late, overpaying for assets in the process. CE Nick Riley says they have been looking for deals in the UK and Europe. But he’s not convinced that now is the right time to increase the company’s offshore exposure. “Pricing in many markets appears to be at the top of the cycle, which has been driven up by cheap money. What happens when interest rates start to rise? We believe there will be a pullback and we’ll wait for prices to come down before we buy.”

Regarding increased appetite among investors for niche property plays that focus only on one subsector, Riley says IPF has no intention to move away from its diversified approach. “We have operated across all sectors of the property market for 35 years and remain comfortable to be well diversified across the retail, office and industrial sectors.”

He concedes that investors don’t necessarily like external management companies, but says there is no intention to internalise this function. IPF and Investec Property recently renewed their management contract until 2025. “Investec is a well-respected brand, whose interests are closely aligned with that of IPF.”