Prop­erty: Con­sol­i­da­tion and ac­qui­si­tion the ma­jor themes

Finweek English Edition - - INSIDE - BY NESI CHETTY, Ac­cel­er­ated book­build/place­ment

In a f inan­cial world where risk and eco­nomic con­di­tions change on a daily ba­sis, re­bal­anc­ing a port­fo­lio to get the right as­set class mix can be tricky. One as­set class that has de­liv­ered year af­ter year, and pro­vided South African in­vestors with solid re­turns, has been listed prop­erty, which de­liv­ered an ex­cep­tional 26.6% (cap­i­tal 18.6%, in­come 8.0%) to­tal re­turn in 2014. This stand­out per­for­mance was driven by lower bond yields and strong prop­erty mar­ket fun­da­men­tals, which con­tinue to persist in a low inf la­tion and rate en­vi­ron­ment.

“Last year saw listed prop­erty track bond yields lower for the most part and, given that the con­sen­sus for in­fla­tion has mod­er­ated, it seems that this sec­tor still has some room to move,” says Nesi Chetty, head of Prop­erty at Mo­men­tum As­set Man­age­ment. PROP­ERTY IN­VEST­MENT OP­POR­TU­NI­TIES IN 2015 The fun­da­men­tal prospects for listed prop­erty look good in 2015. Re­tail prop­erty com­pa­nies are still man­ag­ing to ob­tain es­ca­la­tions rates of 7% to 8%. While we have seen some down­ward pres­sure on es­ca­la­tion rates from the large food an­chors like Sho­prite and Wool­worths, the sec­tor has not budged on set­ting high rates. Re­ver­sion­ary rental con­cerns in the of­fice mar­ket have abated some­what and we con­tinue to see new of­fice sup­ply in most nodes. Key to of­fice va­can­cies will be the rate at which new space is ab­sorbed in nodes such as Sand­ton, Men­lyn and Cen­tu­rion. blowout. With low rent-to-turnover ra­tios (be­low 10%) in most su­per-re­gional cen­tres, prop­erty com­pa­nies do have the abil­ity to pass th­ese ris­ing costs on to ten­ants. An in­flec­tion point will, how­ever, oc­cur when the rental bur­den is too much and the land­lords get push­back from ten­ants. The slow­ing trad­ing per­for­mance at Ed­con is also a con­cern as the listed prop­erty sec­tor’s ex­po­sure to Ed­con on a space ba­sis (gross lease area) is al­most twice that of El­ler­ines and African Bank. CAP­I­TAL RAIS­ING IN 2014 The for­eign earn­ings com­po­nent of SA listed prop­erty has in­creased steadily and is now at 20% (growth in NEPI, Rock­cas­tle and other com­pa­nies has in­creased this for­eign con­tri­bu­tion). Last year was a bumper year for the listed prop­erty sec­tor in terms of cap­i­tal rais­ings. Close to R37bn was raised in var­i­ous pri­vate place­ments, ini­tial public of­fer­ings (IPO) and book­builds (most be­ing over­sub­scribed by three or four times). MA­JOR PROP­ERTY THEMES Con­sol­i­da­tion and ac­qui­si­tion in the prop­erty sec­tor will con­tinue to be the ma­jor themes this year. Smaller prop­erty list­ings will look to bulk up on as­sets, in some in­stances over­pay­ing for greater re­tail and of­fice ex­po­sure. In the short term, this is likely to push prop­erty yields lower.


Some new trends are emerg­ing in the listed prop­erty space, with com­pa­nies pre­pared to de­velop or gain ex­po­sure to the res­i­den­tial prop­erty sec­tor. Nor­mally the domain of res­i­den­tial heavy­weight Octodec, com­pa­nies like SA Cor­po­rate and Ar­row­head are now mak­ing do­mes­tic prop­erty in­vest­ment in­roads.

The Mo­men­tum Prop­ert y Fund con­tin­ues to hold Growth­point, Re­de­fine, NEPI, Hyprop and EMIRA as its top stock picks and ex­pects the listed sec­tor to pro­duce re­turns of be­tween 10% and 13% for the full year.

The f und has now ex­ceeded t he R1 bil­lion as­sets un­der man­age­ment mark and con­tin­ues to be a top-quar­tile per­former. “Hav­ing the right bal­ance be­tween do­mes­tic and off­shore prop­erty was in­stru­men­tal to the fund’s suc­cess last year. With quan­ti­ta­tive eas­ing in the US ta­per­ing, se­lect­ing prop­erty shares that ben­e­fit­ted from a yield re-rat­ing paid off,” concludes Chetty.


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