Best time for SA in­vestors to ven­ture off­shore

Finweek English Edition - - FRONT PAGE -

SOUTH AFRICAN in­vestors will have a new op­por­tu­nity to cash in on the up­side of­fered by the re­cov­ery in global real es­tate when Re­de­fine Prop­er­ties lists its UK, Ger­man and Aus­tralian prop­erty in­ter­ests on the main board of the JSE end-Au­gust.

The counter, named Re­de­fine In­ter­na­tional, is the SA sub­sidiary of UK-listed Corovest In­ter­na­tional Real Es­tate Fund (Ciref) and will be struc­tured on the JSE as a loan stock com­pany.

SA-listed Re­de­fine Prop­er­ties, led by vet­eran prop­erty deal­maker Marc Wainer, last year acquired a con­trol­ling stake in Ciref and its man­age­ment com­pany, paving the way for a name change to Re­de­fine In­ter­na­tional (RI). RI’s JSE-list­ing will be ac­com­pa­nied by a £100m (R1,14bn) pub­lic rights is­sue with a min­i­mum in­vest­ment re­quire­ment of R10 000. The stock should have a mar­ket cap of around R2,5bn at list­ing, with an es­ti­mated in­come yield of 8%.

A suc­cess­ful cap­i­tal rais­ing ex­er­cise will pro­vide man­age­ment with a sub­stan­tial cash pile to bulk up its ex­ist­ing port­fo­lio. Wainer would like to see RI’s mar­ket cap swell to around R4bn within the next 12 to 18 months. He be­lieves off­shore prop­erty of­fers bet­ter po­ten­tial re­turns than SA bricks and mor­tar. He says man­age­ment is start­ing to see a lot of deals com­ing its way with price tags of be­tween £50m (R570m) and £150m (R1,71bn) and at­trac­tive yields of 7% to 8%.

There’s also up­side on the rental growth front from RI’s ex­ist­ing port­fo­lio, par­tic­u­lar- ly the com­pany’s shop­ping cen­tre port­fo­lio, which com­prises 53% of to­tal rental in­come.

Mike Wat­ters, founder and CEO of RI, says a num­ber of leases are com­ing up for their stan­dard five year rent re­views. For in­stance, RI’s flag­ship UK shop­ping cen­tre Grand Arcade (42 500 sq m) in Wi­gan in greater Manch­ester is ex­pected to achieve rental growth of more than 20% when leases are re­newed in 2011/2012 – the first rental re­views since the cen­tre opened in 2007. Wat­ters noted a marked uptick in foot count at most of RI’s cen­tres. Wat­ters also in­tends grow­ing RI’s re­tail ex­po­sure in Ger­many, which is fo­cused on the dis­counted su­per­mar­ket sec­tor with ten­ants typ­i­cally in­clud­ing ma­jor Euro­pean food and cloth­ing chains such as Lidl, Aldi and Netto. Smaller, stand alone re­tail prop­er­ties can still be bought at yields of 8% to 10%, while debt fund­ing is avail­able at in­ter­est rates of 4% to 5%.

Hos­pi­tal­ity is an­other sec­tor that of­fers growth op­por­tu­ni­ties, with Re­de­fine In­ter­na­tional re­cently en­ter­ing the ho­tel mar­ket for the first time via the ac­qui­si­tion of five London-based Hol­i­day Inn ho­tels for £112m (R1,276bn).

For­mer CEO of South­ern Sun Ho­tels Helder Pereira now heads up RI’s ho­tel di­vi­sion. Pereira says the London ho­tel mar­ket is one of the most re­silient in the world, op­er­at­ing at an av­er­age oc­cu­pancy of more than 80% over the past two years. ”London-based ho­tels that op­er­ate in the bud­get mar­ket of­fer a great yield sweet­ener to any prop­erty port­fo­lio.’’ Pereira esti- mates RI’s five ho­tels will de­liver a re­turn on eq­uity of be­tween 11% and 13,6% over the next three years.

Prop­erty an­a­lysts wel­come the in­creased choice that RI’s list­ing will of­fer SA in­vestors. RI will be the only counter on the main board of the JSE be­sides Cap­i­tal Shop­ping Cen­tres (ex Lib­erty In­ter­na­tional) and its de­merged sis­ter com­pany Cap­i­tal & Coun­ties that gives South Africans ac­cess to global real es­tate mar­kets with­out in­vestors hav­ing to use their off­shore al­lowance.

There is a view that Cap­i­tal Shop­ping Cen­tres (for­mer Lib­erty In­ter­na­tional), a long-time favourite among lo­cal in­vestors ever since SA in­surance ty­coon Don­ald Gor­don founded the UK shop­ping cen­tre group in the early Eight­ies, is ex­pen­sive.

Greg Rawl­ins, prop­erty fund man­ager at Grindrod Bank, says he would rather go for the 8% that the RI cap­i­tal rais­ing ex­er­cise will yield com­pared to the 4% cur­rently avail­able through Cap­i­tal Shop­ping Cen­tres. ”In my opin­ion, the prob­lem with Cap­i­tal Shop­ping Cen­tres is that it has been over­val­ued for a long time by SA in­vestors who had no real al­ter­na­tive. A scarcity fac­tor has over the years propped up the share price. But I won’t be sur­prised to see a drift of these ‘loyal’ share­hold­ers fed up with the low yield.’’

Macquarie First South prop­erty an­a­lyst Leon Al­li­son agrees that a ster­ling yield of 8% makes RI’s pric­ing rel­a­tively at­trac­tive, par­tic­u­larly given the po­ten­tial of global prop­erty yields mov­ing back to their his­tor­i­cal range of around 5% - 6 % over the next few years.

How­ever, Al­li­son notes there are risks in­volved. These in­clude a rel­a­tively high gear­ing ra­tio – RI’s loan-to-value will touch 68% af­ter the cap­i­tal rais­ing ex­er­cise, which is still way above the av­er­age of less than 30% for SA-based prop­erty funds.

At an ini­tial mar­ket cap of R2,5bn and a free float of less than 50% the counter may be less liq­uid than many of its SA-based peers and Cap­i­tal Shop­ping Cen­tres, which could be an is­sue for big­ger, in­sti­tu­tional in­vestors. RI plans to start its cap­i­tal rais­ing road show in SA on 2 Au­gust.

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