FUND RE­VIEWS

Corona­tion Prop­erty Eq­uity Fund, Ses­fik­ile Cap­i­tal Prop­erty Fund, Mo­men­tum Real Growth Prop­erty Fund, Stan­lib Prop­erty In­come Fund, Dis­cov­ery Flex­i­ble Prop­erty Fund

Financial Mail - Investors Monthly - - Contents - STEPHEN CRANSTON

SA listed prop­erty has been by far the most suc­cess­ful as­set class over the past 15 years. It has given an av­er­age re­turn of 18.9% since 2004, more than dou­ble that from both nom­i­nal and in­fla­tion­linked bonds and ahead of the 16.5% from eq­ui­ties. It has en­abled the sec­tor to grow from R20bn to R450bn. And port­fo­lio man­agers have a sub­stan­tial choice, from gi­ant di­ver­si­fied busi­nesses such as Growth­point to highly spe­cialised funds such as Stor-Age and lo­gis­tics group Equites.

The in­dus­try has catered for in­creased in­vestor de­mand by mov­ing into other ter­ri­to­ries, own­ing a big chunk of the mar­ket in Poland and Ro­ma­nia, and more re­cently Mace­do­nia, Mon­tene­gro and Ser­bia.

In­vestors had got used to lower pull­backs from prop­erty than from eq­ui­ties. But the year be­gan poorly, with a to­tal loss of close to 20% in the three months to March. Prop­erty yields looked de­mand­ing at about 5.9% rel­a­tive to 8.2% from the 10-year RSA bond. But the cat­a­lyst for the slump turned out to be stock-spe­cific is­sues around the Re­silient group, with its com­plex web of cross-hold­ings. It was crit­i­cised for in­clud­ing non­re­cur­ring profit, on de­riv­a­tives and for­eign ex­change, in its an­nual profit dec­la­ra­tion. And the trauma has caused other prop­erty busi­nesses to ex­am­ine their own in­come state­ments. In the long run this should lead to cleaner, sim­pler re­sults.

SA prop­erty used to con­sist of some small do­mes­tic coun­ters and the huge UK-based Lib­erty In­ter­na­tional. At the time it made sense to ex­clude Lib­erty In­ter­na­tional from the SA listed prop­erty in­dex. Now, the suc­ces­sors to Lib­erty In­ter­na­tional, Intu and Cap­i­tal & Coun­ties, are not the largest prop­erty shares on the JSE or even in the top three. It makes no sense to keep them out of the in­dex but treat Nepi Rock­cas­tle or Echo Pol­ska Prop­er­ties as “do­mes­tic” shares.

The sec­tor will have a much cleaner bench­mark when the more in­clu­sive all prop­erty in­dex is in­tro­duced, which is also ex­pected to cap the weight­ing of shares, re­duc­ing Growth­point’s “Naspers-style” dom­i­nance of the sec­tor.

The in­dus­try won’t turn around overnight af­ter the Re­silient cri­sis. There has been lim­ited cap­i­tal rais­ing this year, the largest be­ing R4.5bn from Growth­point, barely 5% of its mar­ket cap. And there are con­cerns about the con­cen­tra­tion of SA prop­erty de­vel­op­ment, par­tic­u­larly in of­fices. Ten out of 53 recog­nised nodes ac­count for 92% of de­vel­op­ment, Sand­ton alone ac­counts for 31%.

There has been a spread of re­turns in the first half. The star man­agers in the pre­vi­ous years, Me­tope and Absa, de­clined by about a quar­ter. The five man­agers se­lected this month did rather bet­ter. The more in­dex-fo­cused, low­track­ing-er­ror funds, Mo­men­tum and Stan­lib, shed about 15%, but Corona­tion, Ses­fik­ile and the Dis­cov­ery Flex­i­ble Prop­erty Fund were down about 10%.

Ses­fik­ile’s rel­a­tive suc­cess has al­lowed it to grow into one of the largest BEE man­agers in SA. It is ideally suited as the prop­erty com­po­nent of a mul­ti­man­ager port­fo­lio. It does not have the risk pro­file or Icarus­like ap­proach of high-oc­tane man­agers such as Lil­iane Barnard at Me­tope or Fayyaz Mot­tiar at Absa, so it should be at­trac­tive.

Note that the man­dates of the funds are the same with the ex­cep­tion of Dis­cov­ery Flex­i­ble Prop­erty. It is run by the same team as the Prop­erty Eq­uity Fund un­der Peter Clark, but it can also in­vest in shares that do not trade on the JSE. Its main off­shore hold­ing is Glob­al­worth, which, like many of the JSE shares, in­vests in Poland and Ro­ma­nia, but pri­mar­ily in of­fices, tak­ing ad­van­tage of the out­sourc­ing of West­ern Euro­pean back of­fices east­wards. ●

“The sec­tor will have a much cleaner bench­mark when the more in­clu­sive all prop­erty in­dex is in­tro­duced

The fund is run for Dis­cov­ery by Peter Clark of In­vestec As­set Man­age­ment, who took over when Neil Stu­ar­tFind­lay em­i­grated to Aus­tralia last year.

In­vestec has a team of six prop­erty spe­cial­ists, di­vided be­tween Lon­don and Cape Town. There is a Chi­nese wall be­tween the fund and the In­vestec Prop­erty Fund, run out of Jo­han­nes­burg. Over the past 10 years, the fund has been in the top three unit trusts, beaten only by Absa Prop­erty (which had a poor start to 2018) and the Corona­tion In­dus­trial Fund.

The Flex­i­ble Prop­erty Fund has a wider man­date than the usual vanilla SA funds as it can in­vest across the world and not just on the JSE. It is a sup­porter of Ger­man com­mer­cial prop­erty group Around­town as well as Glob­al­worth (which in­vests in of­fices and in­dus­trial prop­erty in Poland and Ro­ma­nia), giv­ing a dif­fer­ent op­por­tu­nity in a re­gion where SA-based funds are fix­ated on re­tail, as well as Uni­bail-Ro­damco-West­field, which has a huge re­tail port­fo­lio in Europe, the UK and US.

Though size comes with its own prob­lems, it will be hard for any­one to repli­cate its foot­print. Clark says he can even take ad­van­tage of the man­date to buy Intu shares in Lon­don and not on the JSE when there has been a pric­ing mis­match.

He says the fund went into the new year with zero Re­silient, based on its pre­mium to NAV at the time, and is hold­ing off un­til the in­quiries are fin­ished. But he does hold Fortress A, which of­fers fixed div­i­dend growth, as well as Nepi Rock­cas­tle.

Clark says man­agers have to be at least bench­mark-aware in such a nar­row sec­tor. The fund owns 15 of the 20 shares in the SA prop­erty in­dex and he says there is lim­ited liq­uid­ity at the lower lev­els of the in­dex and of course in those shares out­side. He has still been pre­pared to build a po­si­tion in the off-bench­mark At­lantic Leaf.

The big three make up 46% of this fund and Hyprop is in fourth po­si­tion. Its most ag­gres­sive off-bench­mark po­si­tion is 7.2% in mid-cap Vuk­ile. The 3.6% hold­ing in At­tacq also stands out. Clark says the fund ben­e­fited from its un­der­weight hold­ing in Fortress B, but missed the re­cov­ery in Green­bay, an­other Re­silient share. ●

This fund is run by a niche prop­erty as­set man­ager with about R18bn un­der man­age­ment. There are three port­fo­lio man­agers: Mo­hamed Kalla, once an award-win­ning prop­erty an­a­lyst at BJM Se­cu­ri­ties; Evan Jankelowitz, pre­vi­ously part of the pi­o­neer­ing Stan­lib; and Kun­dayi Mun­zara from the In­vestec Prop­erty team.

The team adopts a “4D ap­proach”: pas­sion for di­rect prop­erty, get­ting stuck in the de­tail, un­der­stand­ing the driv­ers of prop­erty in­vest­ment, and tak­ing views on cor­po­rate ac­tion deals. This is a bench­markaware fund that aims to beat the listed prop­erty in­dex over three to five years.

Its port­fo­lio looks less like a closet tracker than many of its peers. The big three — Growth­point, Rede­fine and Nepi Rock­cas­tle — take the top slots, but Vuk­ile is ahead of reg­u­lar num­ber four Hyprop.

Mun­zara says Growth­point’s di­ver­sity has come through, and it will be able to achieve 6% rental growth. It has turned its largest as­set, its half share of the V&A Wa­ter­front, into a much stronger, more rel­e­vant des­ti­na­tion.

The fund is over­weight in some less prom­i­nent names, such as Echo Pol­ska Prop­er­ties, MAS Real Es­tate, Equites and Ar­row­head, as well as Fair­vest and Stor­Age. In­vestec Prop­erty Fund is the only other more main­stream fund in the top 10.

Kalla says the fund will look closely at the re-formed Cap­i­tal & Coun­ties if it splits the Covent Gar­den and Earl’s Court as­sets. Ses­fik­ile’s main UK ex­po­sure has been through Ham­mer­son. It strongly op­posed the takeover of Intu, which would have di­luted the value of some of Ham­mer­son’s qual­ity Euro­pean prop­er­ties. Intu also has a poor, highly geared bal­ance sheet.

Jankelowitz says it is im­por­tant that the fund only in­vests in shares that be­have like prop­erty coun­ters. The re­vamped Hos­pi­tal­ity — which will soon in­clude the Tsogo Sun casino as­sets — barely qual­i­fies as a prop­erty com­pany.

Mun­zara says there is lim­ited over­lap with the Ses­fik­ile Global Prop­erty Fund’s uni­verse, other than the JSE-listed UK­head­quar­tered busi­nesses and In­vestec Aus­tralia. The global fund fo­cuses on de­vel­oped mar­kets, look­ing at West­ern not East­ern Europe. The UK makes up just 5% of the bench­mark and North Amer­ica al­most two-thirds. It has 48 shares right now. ●

Stan­lib Prop­erty In­come Fund is the largest fund in the sec­tor, with R10bn un­der man­age­ment, and the team un­der Keillen Ndlovu man­ages a fur­ther R10bn for in­sti­tu­tional clients and R5bn in off­shore prop­erty.

With the sec­tor mar­ket cap of more than R450bn there is no pres­sure to cap the fund just yet. But Ndlovu says its size does not force it to act like a closet in­dex man­ager.

More than 40% of the port­fo­lio is in­vested in three shares — Growth­point (17.6%), Nepi Rock­cas­tle (14.1%) and Rede­fine (10.8%). Yet this is an un­der­weight po­si­tion against the in­dex. It went into the cur­rent cri­sis over­weight in Re­silient Group shares, and af­ter tak­ing pain hopes to ben­e­fit from some re­cov­ery, with a 6.8% weight­ing to Re­silient it­self and 4.8% in Fortress B.

Its over­weight po­si­tions have been in off­shore-fo­cused shares like Ham­mer­son and Sir­ius Real Es­tate, and spe­cial­ist busi­nesses such as Stor-Age. Fair­vest and Stor­Age were the main con­trib­u­tors to per­for­mance in the first quar­ter. Af­ter Nepi Rock­cas­tle, its largest pure off­shore ex­po­sure is MAS Real Es­tate (2.4%). There is an eclec­tic se­lec­tion in its top hold­ings, in­clud­ing sec­tor ugly duck­ling SA Cor­po­rate (4.5%), the low-key In­vestec Prop­erty Fund (3.5%) and the in­creas­ingly pop­u­lar Vuk­ile (3.2%).

Ndlovu says there is a fo­cus on in­come as long as the op­por­tu­nity works on a riskad­justed ba­sis. When it comes to high­qual­ity re­tail funds, Ndlovu is bet­ting on Hyprop (8.9%) over Stan­lib’s sis­ter compa-

ny Lib­erty Two De­grees, which doesn’t even make the top 10.

Ndlovu will take a look at Cap­i­tal & Coun­ties if it splits be­tween a res­i­den­tial share cen­tred on Earl’s Court in West Lon­don, and a re­tail share con­sist­ing of the Covent Gar­den es­tate.

He says the mar­ket has nor­malised over the past year, with SA shares now rarely trad­ing at a pre­mium to NAV (as Re­silient once did) and UK shares trad­ing at a dis­count of 30% or even 50% to NAV. He says prop­erty as an as­set class now has yields closer to bonds, with the bonus that it has con­sid­er­able built-in in­fla­tion pro­tec­tion.

Across the sec­tor on the JSE there is ex­pected to be dis­tri­bu­tion growth of 6% over the next 12 months. Ndlovu says the fund of­fers a bal­ance be­tween de­fen­sive SA prop­erty ex­po­sure and strong off­shore dis­tri­bu­tion growth ex­po­sure. Strong phys­i­cal prop­erty fun­da­men­tals un­der­pin both parts of the fund. ● I t is hard to know which Mo­men­tum funds will be pre­served now it has gone the mul­ti­man­ager route. But the of­fi­cial word is that this one has a long-term fu­ture.

Fund man­ager Nesi Chetty is one of the few re­main­ing mem­bers of the old RMB As­set Man­age­ment team still in the or­gan-

“The fund fo­cuses on shares trad­ing be­low their long-term in­trin­sic value

isa­tion. Mo­men­tum re­fused to sell its listed prop­erty man­ager to bou­tique man­agers hop­ing to get into the sec­tor, even though it had at­trac­tive of­fers.

Chetty’s num­ber two is Pelo Manye­neng and the team re­cently added Madibana Let­soalo, a quan­tity sur­veyor who worked at com­mer­cial bro­ker JLL.

The team man­ages R7bn, of which R2.4bn is in unit trusts. Chetty says the for­ward yields of prop­erty stocks are at­trac­tive in a sec­tor with gear­ing of just 36%. Fund man­agers can take their chances with any­thing from MAS Real Es­tate on 5.3% to Re­bo­sis on 17.3%. The av­er­age is nudg­ing 10%.

Chetty says the aim is to pro­vide sus­tain­able risk-ad­justed re­turns over the in­vest­ment hori­zon. The fund fo­cuses on shares trad­ing be­low their long-term in­trin­sic value. That can’t have been easy in listed prop­erty, a hyped as­set class for years.

No less than 83% of the port­fo­lio is in the top 10, which in­cludes four Re­silient group shares: Re­silient it­self, Nepi Rock­cas­tle and Fortress A and B.

MAS Real Es­tate and Sir­ius Real Es­tate are the two most sub­stan­tial over­weights, along­side do­mes­ti­cally fo­cused Oc­todec. There is a close to full al­lo­ca­tion to Growth­point (22.4%) and Rede­fine (16%), but it does noth­ing to hide the fact that it is a low track­ing-er­ror fund.

Chetty says the out­look for prop­erty is bet­ter than it was a year ago. He ex­pects a to­tal re­turn for the fund and the sec­tor of 14%-15%. To max­imise this he has min­imised ex­po­sure to what he calls the weak­est sec­tor, of­fices, which is just 10% of the fund. It has 25% off­shore and 45% on lo­cal re­tail, and 15% in in­dus­trial and stor­age.

The fund has been build­ing an over­weight po­si­tion in both Fortress A and B, as Chetty be­lieves Fortress has the strong­est in­dus­trial port­fo­lio in the sec­tor, a strong de­vel­op­ment pipe­line and low va­can­cies. ● O ne of the old­est funds in the sec­tor and now run by An­ton de Goede and Kanyane Mat­lou, this fund got through the trau­matic first quar­ter com­par­a­tively well, los­ing 12.7% when the bench­mark was down 19.6%.

The fund re­mains fully in­vested in prop­erty, with less than 1% in cash, and it holds 30 of the 50 shares in its uni­verse. Many of the shares out­side the Re­silient sta­ble held steady. The fund did not hold Re­silient in its top 10, and within the sta­ble it only held Nepi Rock­cas­tle (10.7%), and Fortress A (4.1%) and B (2.1%). It has rel­a­tively large po­si­tions in At­tacq (5.8%) and In­vestec Prop­erty Fund (4.2%). It has a slight pref­er­ence for Rede­fine (14.6%) over sec­tor gi­ant Growth­point (13.4%), as Rede­fine has a 1.5% ad­di­tional yield. In line with most of its peers, it has Hyprop (6.9%) in fourth place.

De Goede says it has been a stock­picker’s mar­ket, with re­turns vary­ing from a neg­a­tive 50% for Fortress B to a pos­i­tive 20% for Emira. But in­vestors should ex­pect muted growth from the sec­tor, as rental growth is low.

There are few pure SA shares. One of the clos­est is SA Cor­po­rate, in which the fund has a 4.1% hold­ing. The share has a large res­i­den­tial port­fo­lio, which adds to its de­fen­sive­ness. Though UK-fo­cused Intu, Ham­mer­son and Cap­i­tal & Coun­ties look cheap, De Goede says there is still too much risk in the Brexit-driven en­vi­ron­ment.

The team also looks at in­ter­na­tional prop­erty shares for multi-as­set funds such as Corona­tion Global Man­aged, but the trust deed of the Prop­erty Eq­uity Fund re­stricts it to JSE-listed shares. Within th­ese, in­vest­ments stretch from Aus­tralia to Ser­bia to Spain, with a chunk in Poland and Ro­ma­nia. De Goede likes Vuk­ile’s ex­po­sure to Spain — one of the more promis­ing economies. ●

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