Ex­tra space for growth

Prop­erty in­vestors are turn­ing to al­ter­na­tive real es­tate sec­tors that are less ex­posed to eco­nomic swings

Financial Mail - - MONEY & INVESTING - Joan Muller mullerj@fm.co.za

The only Sa-fo­cused prop­erty stocks — be­sides peren­nial out­per­form­ers Fortress In­come Fund and Re­silient Reit — that count among the sec­tor’s top 10 in terms of share price growth over 12 months are self-stor­age op­er­a­tor Stor-age Prop­erty Reit and lo­gis­tics play Equites Prop­erty Fund. The two coun­ters are up 18% and 39% in the year to Septem­ber 29. That com­pares with a 6% rise in the SA listed prop­erty in­dex as a whole over the same pe­riod.

An­a­lysts say de­mand for spe­cial­ist of­fer­ings such as Stor-age and Equites is in­dica­tive of grow­ing ap­petite for stocks that in­vest in non­tra­di­tional real es­tate sec­tors.

“Re­cent re­sults re­ported by the listed prop­erty sec­tor show that the earn­ings qual­ity of com­pa­nies ex­posed to the retail, of­fice and in­dus­trial sec­tors has de­te­ri­o­rated quite quickly on the back of a weak econ­omy,” says Ses­fik­ile Cap­i­tal port­fo­lio man­ager and direc­tor Kun­dayi Mun­zara. He says it is be­com­ing in­creas­ingly dif­fi­cult for di­ver­si­fied funds just to main­tain

in­fla­tion-beat­ing div­i­dend growth. In con­trast, niche of­fer­ings such as Stor-age and Equites are still de­liv­er­ing sec­tor-lead­ing growth.

Mun­zara says that, as a re­sult, man­age­ment teams are in­creas­ingly look­ing at al­ter­na­tive as­set classes that are less cycli­cal or vul­ner­a­ble to eco­nomic ups and downs. He be­lieves self­s­tor­age, stu­dent hous­ing, in­fra­struc­ture (in­clud­ing cell­phone tow­ers and power plants) and health-care-fo­cused prop­erty funds will gain fur­ther trac­tion over the next two to three years as the SA econ­omy slows.

“Glob­ally, in­vestors have paid a pre­mium for spe­cial­i­sa­tion in com­pa­nies and shown higher de­mand for prop­erty stocks that op­er­ate in these new real es­tate sec­tors as they tend to be more de­fen­sive in a down­turn than their ma­ture, more tra­di­tional coun­ter­parts,” says Mun­zara.

Self-stor­age is a par­tic­u­larly in­ter­est­ing sec- tor given that it is still in its in­fancy in SA. Wy­nand Smit, re­search an­a­lyst at An­chor Stock­bro­kers, says there is no doubt that self-stor­age is in­creas­ingly on the radars of SA in­vestors as the dy­nam­ics are at­trac­tive, es­pe­cially rel­a­tive to more es­tab­lished prop­erty sec­tors.

Some of the de­mand driv­ers for self-stor­age, such as life events (mar­riage, di­vorce, death, birth) and re­lo­ca­tions, are not linked to the per­for­mance of the econ­omy. In fact, Smit notes that some de­mand driv­ers are coun­ter­cycli­cal and can lead to in­creased de­mand in a down­turn. For in­stance, more peo­ple may be forced to rent or scale down to a smaller prop­erty in a re­ces­sion, cre­at­ing ad­di­tional de­mand for short­term stor­age of fur­ni­ture and other pos­ses­sions.

Smit says the self-stor­age in­dus­try in SA is fairly frag­mented, which cre­ates scope for con­sol­i­da­tion among es­tab­lished play­ers with strong op­er­a­tional plat­forms. “How­ever, the sec­tor will need to gain scale in or­der to of­fer in­sti­tu­tional in­vestors ad­e­quate liq­uid­ity.”

The only pure self-stor­age play cur­rently avail­able to JSE in­vestors is Stor-age.

How­ever, SA Cor­po­rate Real Es­tate re­cently en­tered the sec­tor through a R65.6m in­vest­ment in Stor­age Ge­nie, while rand hedge counter Schroder Euro­pean Reit of­fers in­vestors ex­po­sure to the UK self-stor­age mar­ket.

Stor-age was founded 12 years ago by Cape Town-based char­tered ac­coun­tants Gavin Lu­cas and Steven Hor­ton and listed on the JSE in Novem­ber 2015. The com­pany is the largest self-stor­age op­er­a­tor in SA. Its lo­cal port­fo­lio spans 300,000 m² across 31 prop­er­ties worth R2.1bn.

Last month, man­age­ment an­nounced its first off­shore ac­qui­si­tion, a 97.3% stake in Uk-based Stor­age King for £77.13m. Stor­age King op­er­ates 25 fa­cil­i­ties across Eng­land and is the sixth­largest self-stor­age brand in the UK in terms of num­ber of stores.

Lu­cas says they ini­tially thought it would take three to five years to ed­u­cate the SA mar­ket on the in­vest­ment case for self-stor­age. How­ever, it has taken less than two years for Stor-age to get the back­ing of a wide range of in­sti­tu­tional in­vestors.

“The big boys have bought into the story sooner than we anticipated, which I sus­pect has to do with how well the self-stor­age sec­tor has per­formed in the UK and US.

“We have also de­liv­ered on our prelist­ing prom­ises,” says Lu­cas.

The big boys have bought into the [Stor­Age] story sooner than we anticipated, which I sus­pect has to do with how well the self-stor­age sec­tor has per­formed in the UK and US. We have also de­liv­ered on our prelist­ing prom­ises Gavin Lu­cas

He be­lieves the big­gest mis­con­cep­tion about the sec­tor is the per­ceived risk of hav­ing short­term ten­ants, sim­i­lar to those of ho­tels, which some an­a­lysts equate with an in­con­sis­tent level of earn­ings. “But in re­al­ity that risk doesn’t ex­ist.”

Lu­cas says that while leases are struc­tured on a month-to-month ba­sis, the av­er­age length of stay in the Stor-age port­fo­lio is 14 months. The fact that the com­pany has nearly 20,000 in­di­vid­ual ten­ants also mit­i­gates risk, as it is not ex­posed to a po­ten­tial large va­cancy when one or two ten­ants leave, as is of­ten the case in the of­fice mar­ket.

Lu­cas says ini­tial con­cerns that growth op­por­tu­ni­ties in the SA self-stor­age mar­ket were lim­ited also proved un­founded.

“We have nearly dou­bled our port­fo­lio from around R1.2bn to R2.1bn in less than two years since list­ing. In ad­di­tion, we have a de­vel­op­ment pipe­line worth R1bn that will be brought on­stream over the next three years. And if one also con­sid­ers our re­cent UK ac­qui­si­tion and de­vel­op­ment op­por­tu­ni­ties in that mar­ket, our growth story is very much in­tact.”

De­spite the re­cent run in its share price, Stor-age is still trad­ing at a rel­a­tively at­trac­tive for­ward yield of 8.2%, ahead of the 7.6% sec­tor av­er­age.

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