Bri­tain’s cheap – but is it worth buy­ing?

SA bricks and mor­tar may be a safer bet for now

Finweek English Edition - - Moneyclinic -

THE STRONG RAND, cou­pled to ten­ta­tive signs that global real es­tate has turned the cor­ner and trad­ing at what ap­pears to be dirt-cheap lev­els in many coun­tries, makes a com­pelling case for South African in­vestors to di­ver­sify their prop­erty port­fo­lios off­shore. How­ever, if you ex­pect su­per re­turns from in­ter­na­tional bricks and mor­tar in­vest­ments over the next few years, you’re likely to be sorely dis­ap­pointed. That was a key mes­sage from a num­ber of speak­ers at an off­shore prop­erty sem­i­nar held last week in Jo­han­nes­burg and Cape Town hosted by San­lam Pri­vate In­vest­ments (SPI), in as­so­ci­a­tion with Fin­week and Gas Prop­er­ties.

The Bri­tish com­mer­cial prop­erty mar­ket – cur­rently be­ing tar­geted in a big way by in­ter­na­tional in­vestors, in­clud­ing many op­por­tunis­tic or so-called vul­ture funds from SA – ap­pears to be in for a par­tic­u­larly bumpy ride. “In Bri­tain, com­mer­cial prop­erty val­ues are down 45% from 2007 peaks – but that doesn’t mean val­ues will rise again by 45%,’’ said An­thony Rosen­thal, di­rec­tor of Bri­tish-based prop­erty in­vest­ment firm Tavi­ton.

Rosen­thal noted there’s still con­cern about the health of Cor­po­rate Bri­tain. Re­tail prop­erty is prob­a­bly worse off than the of­fice and in­dus­trial sec­tors, with an­other 15 to 20 Bri­tish re­tail­ers ex­pected to go into ad­min­is­tra­tion over the next three months. Said Rosen­thal: “Over the short term Bri­tain’s prop­erty in­vest­ment mar­ket won’t be about shoot­ing out the lights but rather about mit­i­gat­ing the risks.’’

Lukas Nakos, MD of Bri­tish-based real es­tate fund man­age­ment com­pany Salt Group, held a sim­i­lar view. The high cost of fi­nance in Bri­tain, cou­pled to on­go­ing bank liq­uid­ity is­sues, make cap­i­tal growth on prop­erty in­vest­ments highly un­likely. “Our fore­cast doesn’t as­sume any cap­i­tal growth for Bri­tish com­mer­cial prop­erty in­vest­ments for the next five years.”

Nakos said Bri­tish com­mer­cial prop­erty in­vestors should also not ex­pect rental growth over the next few years. “The fo­cus is now squarely on se­cur­ing in­come streams in prime build­ings backed by long leases and strong ten­ants.”

Marco Ra­paglia, di­rec­tor at Athanor, a joint ven­ture com­pany with Pam Gold­ing Prop­er­ties that sources com­mer­cial prop­erty in­vest­ments in Bri­tain for SA in­vestors, said Bri­tain’s com­mer­cial land­lords aren’t only fac­ing fall­ing rentals but in some cases no rental in­come at all. He told del­e­gates it wasn’t un­usual for com­mer­cial land­lords to give ten­ants two to three year rent-free pe­ri­ods just to fill empty build­ings.

Al­wyn van der Merwe, di­rec­tor of in­vest­ments at SPI, said SA in­vestors need to care­fully weigh risk/re­turn is­sues be­fore tak­ing the off­shore plunge. And he wasn’t con­vinced SA in­vestors will nec­es­sar­ily make more money off­shore than in their own back yard. Van der Merwe said over the past 10 years, most SA as­set classes out­per­formed their off­shore coun­ter­parts in rand terms. For ex­am­ple, while the SAlisted prop­erty in­dex was up an av­er­age 23%/year over the past decade, an in­vest­ment in Bri­tish shop­ping cen­tre owner Lib­erty In­ter­na­tional de­liv­ered a re­turn of just 2,2%/year. Sim­i­larly, SA eq­ui­ties were up 18%/year while re­turns on Lon­don’s FTSE were flat.

Lat­est fig­ures from Cape-based Cat­a­lyst Fund Man­agers sup­port the view lo­cal prop­erty stocks are gen­er­ally de­liv­er­ing bet­ter rand re­turns to in­vestors than listed prop­erty over­seas.

Cat­a­lyst’s Oc­to­ber over­view on global listed prop­erty re­ports in­vestors have earned a to­tal re­turn of 9,63% on lo­cal prop­erty stocks (SA-listed prop­erty in­dex) in the year to date (Jan­uary to Oc­to­ber), com­pared to a to­tal re­turn of only 2,41% from global prop­erty stocks, as mea­sured by the UBS global in­vestors’ in­dex over the pe­riod. The lat­ter com­prises listed real es­tate mar­kets in the United States, Bri­tain, Europe, Asia and Aus­tralia.

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