Finweek English Edition - - FRONT PAGE - Paul Dun­can, In­vest­ment Man­ager at Cat­a­lyst Fund Man­agers


The In­vestec Aus­tralia Prop­erty Fund ( I APF) l i sts on t he main board of the JSE on 23 Oc­to­ber 2013. The port­fo­lio is made up of six lo­gis­tics prop­er­ties and two of­fice prop­er­ties val­ued at ap­prox­i­mately AUD130m (ap­prox­i­mately R1.2bn).

The f irst step when con­sid­er­ing the in­vest­ment case for a listed real-es­tate op­por­tu­nity is to un­der­stand the as­sets that un­der­pin the cash f lows. This may seem ob­vi­ous, but many in­vestors fo­cus on the head­line num­bers and don’t thor­oughly an­a­lyse the real es­tate that ac­tu­ally drives the value propo­si­tion.


1 The port­fo­lio is of a good qual­ity, with all the build­ings be­ing less than five years old. 2 The build­ings are mod­ern, meet­ing cur­rent mod­ern spec­i­fi­ca­tion re­quire­ments. 3 The lo­gis­tics build­ings have the added value of unutilised bulk. 4 The weighted av­er­age lease ex­piry pro­file is long at 6.7 years, with strong lease covenants and guar­an­tees in place. 5 The over­all oc­cu­pancy is 99.4%, which is ad­mirable, but is likely to be nearer to 95% on a nor­malised ba­sis. 6 The port­fo­lio does not ap­pear to be over rented.

Man­age­ment is a key dif­fer­en­tia­tor when con­sid­er­ing in­vest­ing in listed real es­tate and this is of even more im­por- tance when con­sid­er­ing a new l ist­ing with a limited track record. The fund will be man­aged by an es­tab­lished man­age­ment team which has a his­tory with the ex­ist­ing as­sets. The Aus­tralian-based team will be sup­ported by the In­vestec South Africa prop­erty team who, to date, have suc­cess­fully pro­moted Growth­point, Met-board and most re­cently, the In­vestec Prop­erty Fund. The fund is ex­ter­nally man­aged by In­vestec; there­fore it is pru­dent to ap­ply a risk pre­mium to the re­quired re­turn that in­vestors should de­mand to com­pen­sate them for the con­flict of in­ter­est that an ex­ter­nal man­age­ment com­pany presents. In­vestec Bank, In­vestec Prop­erty Fund and di­rec­tors will re­tain mean­ing­ful stakes di­rectly in the fund off­set­ting some of this con­flict of in­ter­est risk. In­vestec is putting their name to the fund.

We ex­pect that the fund will list with an ini­tial for­ward yield of ap­prox­i­mately 7% (at ap­prox­i­mately R9.42). This will be an un­lev­ered yield, be­cause, on list­ing, IAPF will have no debt. This is sig­nif icant when com­par­ing it to the yield on eq­uity of many other lo­cal and global prop­erty list­ings where the loan to val­ues (LTV) av­er­age around the 40% level. IAPF will not be on the back foot when it comes to fund­ing new ac­qui­si­tions as it will not need to im­me­di­ately come back to the cap­i­tal mar­kets when ac­quir­ing as­sets.

We fore­cast t he core port­fo­lio to de­liver f ive-year dis­tri­bu­tion growth of ap­prox­i­mately 3% per an­num, driven by an­nual con­trac­tual es­ca­la­tions of 3.7%, a nor­mal­is­ing of the oc­cu­pancy lev­els to ap­prox­i­mately 95%, mod­est repairs and main­te­nance ex­penses and the con­tain­ment of op­er­at­ing cost growth. There will ini­tially be no in­ter­est rate or f inan­cial lever­age risk. We ex­pect the share to be illiq­uid for some time.

An un­lev­ered in­come yield of 7% (in AUD), plus fore­cast an­nu­alised in­come growth of ap­prox­i­mately 3% per an­num, is in it­self at­trac­tive when com­pared to the Aus­tralian f ive-year govern­ment bond yield to ma­tu­rity of ap­prox­i­mately 3.5%, and Aus­tralian fore­cast inf la­tion of ap­prox­i­mately 2.5% per an­num.

In ad­di­tion, it com­pares favourably to the cat­a­lyst uni­verse of Aus­tralian REITs, which have an av­er­age (in AUD) dis­tributable in­come yield of 6.5% (av­er­age LTV of the Aus­tralian REIT sec­tor is 35%) with a fore­cast f ive-year dis­tributable in­come growth of 3.8%. The SA REIT sec­tor dis­tributable in­come yield (in ZAR) is cur­rently 7.3% (av­er­age LTV of the SA REIT sec­tor is 36%), with a fore­cast f ive year dis­tributable in­come growth of ap­prox­i­mately 7% per an­num.

IAPF has head room of ap­prox­i­mately AUD 75m be­fore its LTV hits 35%. Pro­vided IAPF can ac­quire sim­i­lar or bet­ter-qual­ity as­sets at ini­tial yields of ap­prox­i­mately 8% (af­ter Manco fees of 0.6%, this rep­re­sents a 7.4% ini­tial yield to IAPF share­hold­ers) and fund these at an ap­prox­i­mate fixed-rate cost of debt of 5.5%, the ac­cre­tion to earn­ings for share­hold­ers will be mean­ing­ful and could drive the in­come yield on the list­ing price to ap­prox­i­mately 9%.

IAPF is in a sweet spot due to its size and there­fore ac­cre­tive ac­qui­si­tions will re­ally move the nee­dle. De­pend­ing on man­age­ment’s abil­ity to ex­e­cute on its pipe­line, IAPF has the po­ten­tial to de­liver high sin­gle-digit growth in dis­tributable in­come (in AUD).

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