BROAD HORIZONS

South Africans are look­ing fur­ther afield than Europe for prop­erty, writes Jo­hann Barnard

Financial Mail - Investors Monthly - - Contents -

South Africans are look­ing fur­ther afield than Europe for prop­erty

Ex­po­sure to off­shore prop­erty has be­come a pop­u­lar theme for lo­cal in­vestors look­ing to di­ver­sify out­side SA. Prop­erty’s main ap­peal lies in com­par­a­tively lower risk and reg­u­lar in­come. And, for the most part, in­vestors have been re­warded.

At least, that was the case un­til Re­silient Reit be­came the fly in the oint­ment that caused SA-listed real-es­tate in­vest­ment trusts (Reits) to shrink more than 17% this year to endJuly, against a 1.9% con­trac­tion in the JSE all share in­dex. The group has been ac­cused of ma­nip­u­lat­ing its value through con­vo­luted cross-share­hold­ings, and its share price plunge has hurt the in­dus­try.

It has also hurt in­vestors who piled into lo­cally listed Reits for their rand-hedge qual­i­ties: more than 50% of these Reits have ex­po­sure to global mar­kets.

Re­silient’s trou­bles and the sharp de­cline in the in­dex are not a re­flec­tion of the state of the in­dus­try, nor of the op­por­tu­nity pre­sented by these ex­ter­nally fo­cused funds. His­tor­i­cally, SA listed prop­erty has been the top-per­form­ing as­set class over the past three-, five­and 10-year pe­ri­ods.

The sec­tor’s re­cent speed­bump is not nec­es­sar­ily bad news, ar­gues In­vestec As­set Man­age­ment’s Peter Clark.

“The is­sues ex­pe­ri­enced around the Re­silient group have acted as a cat­a­lyst for ex­tended val­u­a­tions to nor­malise,” he says. “This was par­tic­u­larly the case in a num­ber of East Euro­pean-fo­cused com­pa­nies that traded at high pre­mi­ums to NAV.

“The events have also brought to light a num­ber of un­sus­tain­able earn­ings prac­tices which have, on the mar­gin, been in­flat­ing earn­ings in the sec­tor. We are see­ing a num­ber of com­pa­nies re­set­ting the base here.”

The dip in the sec­tor’s per­for­mance this year should hope­fully be lit­tle more than a cor­rec­tion, and one that long­haul in­vestors should be able to ab­sorb.

A fund that has avoided the dip is the Fairtree Global Real Es­tate Pre­scient Fund. It re­ported in April that its fund was up al­most 10% in US dol­lar terms, beat­ing its bench­mark by 4%.

“Be­cause of the ex­pe­ri­ence with global prop­erty funds, South Africans have started look­ing over­seas for bet­ter op­por­tu­ni­ties, whether in the UK or Cen­tral and South­ern Europe,” says Rob Hart, co­man­ager of the fund. “And that’s opened their eyes to the other op­por­tu­ni­ties around the world.

“Hope­fully that jour­ney is go­ing to con­tinue and they will start look­ing at other mar­kets, like the US and Asia.”

The rand-de­nom­i­nated fund of­fers di­rect ex­po­sure to listed prop­erty groups in the US (50% of the ex­po­sure), Asia in­clud­ing Aus­tralia (30%), and Europe and the UK (20%).

Hart’s part­ner in the fund, Ryan Cloete, says the com­po­si­tion of the port­fo­lio of­fers added di­ver­si­fi­ca­tion for SA in­vestors.

“The SA Reits’ off­shore ex­po­sure is pre­dom­i­nantly con­cen­trated in South­ern and Cen­tral East­ern Europe, whereas we’re look­ing at the whole de­vel­oped world. You have to con­sider the riskre­turn pro­file. There are def­i­nitely op­por­tu­ni­ties in Cen­tral and South­ern Europe, but a lot of those are ac­tu­ally emerg­ing mar­kets them­selves.

“The prob­lem is it be­comes like a tread­mill be­cause you have to keep on mak­ing ac­qui­si­tions to keep your growth up. And, broadly speak­ing, a lot of off­shore ex­pan­sion has been funded by debt and some struc­tures are highly in­debted.

“So now we’re in an en­vi­ron­ment where some lo­cal Reits can’t ex­pand be­cause they don’t have bal­ance-sheet ca­pac­ity any more. What they need now is equity in­jec­tion, and at the cur­rent pric­ing lev­els it would be di­lu­tive. So they’re kind of caught in a catch-22.”

The ar­eas in which Fairtree sees op­por­tu­nity for in­vestors look­ing at global prop­erty in­clude Asia, and ex­clude re­tail.

The lat­ter is al­most a no­brainer, given the pres­sure that con­ven­tional re­tail space is un­der from the e-com­merce boom. “Now, that is good for in­dus­trial but bad for re­tail,” says Hart.

This has in­formed the fund’s strat­egy in mar­kets like the UK, where you might ex­pect to find fewer op­por­tu­ni­ties given the Brexit un­cer­tainty.

“We don’t like UK of­fice or UK re­tail, which leaves you with a cou­ple of niche sec­tors and we’re over­weight those sec­tors,” he says. “This in­cludes in­dus­trial and we also like self­s­tor­age in the UK.”

Fairtree’s Asia fas­ci­na­tion stems from Hart’s ex­pe­ri­ence work­ing in that mar­ket for 20 years.

He ex­plains that ex­po­sure there of­fers not only ge­o­graph­i­cal di­ver­si­fi­ca­tion but also ac­cess to a greater weight­ing of de­vel­op­ers that make up the mar­ket.

Judg­ing by this year-old fund — it has grown as­sets un­der man­age­ment to R55m so far — prop­erty re­tains its al­lure. And more op­tions to gain global ex­po­sure can only be good news for in­vestors.

Ryan Cloete … Port­fo­lio di­ver­si­fi­ca­tion

Rob Hart … Ex­pe­ri­ence in Asia

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