MAKE MONEY WITH:
INVESTEC AUSTRALIA PROPERTY FUND PRESCIENT AFRICA EQUITY FUND MASTER DRILLING
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.
THIS WOULD INCLUDE:
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).