Sharply fo­cused fund hits the spot

Financial Mail - Investors Monthly - - Analysis - Alis­tair An­der­son

Spear Reit is the only West­ern Cape prop­erty spe­cialised fund listed on the JSE. The com­pany has grown strongly since Mike Flax listed it in Novem­ber 2016.

The com­pany does not have a bias to any par­tic­u­lar type of prop­erty as­set but it only buys as­sets which are in the West­ern Cape. Flax re­cently be­came ex­ec­u­tive chair and the MD he ap­pointed, Quintin Rossi, be­came the new CEO.

Spear listed with as­sets worth R1.5bn and a mar­ket cap of about R900m. Since then, it has grown to own R3.3bn in as­sets and the com­pany has an im­pres­sive pipe­line of po­ten­tial deals be­cause Flax and Rossi have a strong net­work of prop­erty con­tacts.

The as­set port­fo­lio should reach R5bn by the end of 2018 say some fund man­agers.

Spear’s strat­egy is to grow, but not for growth’s sake, and Flax and Rossi say they will not be ag­gres­sive in a weak eco­nomic en­vi­ron­ment. Real es­tate through­out the coun­try is un­der pres­sure. This in­cludes the res­i­den­tial mar­ket in Cape Town, where house price growth has be­gun to ta­per off.

Rossi says Spear is ac­quir­ing as­sets that he be­lieves will add value to the Reit for a few years. It may need to sell some of its as­sets dur­ing the rest of the 2018 cal­en­dar year and the first half of 2019.

The group sold a va­cant of­fice prop­erty, 142 Bree Street, lo­cated in the Cape Town CBD, for R150m in March. This was at a sub­stan­tial pre­mium to the book value of the prop­erty.

Rossi says Spear is ben­e­fit­ing largely from sem­i­gra­tion be­cause his team un­der­stands where peo­ple want to stay in Cape Town and that peo­ple who move from Gaut­eng to the Mother City are not only look-

ing to live in up­per-mar­ket ar­eas.

“Peo­ple from all walks of life are seek­ing op­por­tu­ni­ties in the Cape. Not ev­ery­one can af­ford to live on the At­lantic se­aboard but they may be at­tracted to nodes like Som­er­set West and Bel­lville. More peo­ple are start­ing busi­nesses in the Cape and some in­ter­na­tional groups are open­ing Cape Town of­fices. They then at­tract po­ten­tial em­ploy­ees from other cities and fuel sem­i­gra­tion,” he says.

Re­cent jobs data sug­gests he is right, as the ma­jor­ity of job cre­ation in the past year has been in the West­ern Cape.

Statis­tics SA’s Quar­terly Labour Force Sur­vey from Jan­u­ary to March 2018 showed that in the West­ern Cape there were 123,000 more jobs in the first quar­ter of 2018 than there had been in the first quar­ter of 2017. This was 75% of the es­ti­mated 165,000 new jobs which had been recorded in that pe­riod for the whole coun­try.

Spear is the only Cape­cen­tric and the only re­gion­ally spe­cialised prop­erty fund on the JSE.

Rossi says spe­cial­i­sa­tion is at­tract­ing fund man­agers who are ex­cited about Spear’s fu­ture.

The com­pany’s as­sets in­creased 117% dur­ing its 2018 fi­nan­cial year and its per­for­mance ex­ceeded div­i­dend ex­pec­ta­tions by 1.95%, declar­ing a fi­nal div­i­dend of 78.50c per share. It is set to grow its div­i­dend 9%-11% a year for the next two years be­cause of its abil­ity to buy well in the prov­ince, he says.

This is while other listed prop­erty funds have been grow­ing div­i­dends at be­tween 3% and 5% over the past cou­ple of fi­nan­cial years.

Me­tope In­vest­ment Man­agers CEO Lil­iane Barnard says Spear Reit is push­ing to de­liver reg­u­lar dou­ble-digit in­come growth.

A low to­tal port­fo­lio va­cancy of 1.95% in­di­cates there is de­mand for space in Spear’s high-qual­ity port­fo­lio, says Rael Col­ley, a real es­tate an­a­lyst at An­chor Stock­bro­kers. ●

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