Best time for SA investors to venture offshore
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.