Hyprop: Quality retail property pays dividends
Hyprop is one of the core equit y holdings in the Momentum Property Fund. The share has delivered an impressive return of 28% in 2014 and continues to enjoy a strong performance in 2015 (we continue to see upside valuation in the share and have been adding to our position).
Our high-conviction buy view on Hyprop is based on a few factors. The South African property sector has seen a substantial rerating in yields since the start of 2015. The best-performing property shares have either been those with pure retail exposure or a diversified asset base. Retail property companies like Hyprop have benefitted from robust trading density growth and capitalising on new extensions. With total property assets valued at R27bn, Hyprop is well positioned to enjoy future revaluation uplifts in the portfolio as the retail market recovers.
Hyprop has one of t he l owest vacancies across retail companies in South Africa, which is due to t he company attracting strong anchor tenants and foreign retailers t hat demand prime retail space. Current vacancies in retail are around 1.4%, and we think that a structural level is probably close to 1%. Hyprop off ice vacancies are at a low 6%, but we view these assets as non-core and for sale at a potential premium to their book values. New lettings at Lakefield Office Park in Centurion and Canal Walk offices in Cape Town have also brought these office vacancies down.
South African r eta i l propert y companies should, at some stage, trade at similar levels to our global peer group. Canal Walk, which is part of the Hyprop portfolio, is valued at a 6.7% yield, yet similar centres in Australia, which are part of the Westfield Group, are at 5% yields. The rent-to-sales ratio at Hyprop is currently 6.7%, which is very sustainable, but on the low end relative to global norms. Increasing occupancy costs and bringing them more in line with global averages will improve valuations.
Given the strong tenant mix, Hyprop will still achieve real escalation growth in the coming years and we are forecasting rental reversion of around +5% for the group. The big risk to rentals is a potential Edcon failure as the company accounts for 6% of income (although it seems Edcon has a turnaround strategy in place). Extensions to The Glen Shopping Centre i n Johannesburg South should benefit the Hyprop yield as competition enters that node.
Having dominant regional shopping centres across South Africa means that Hyprop is well positioned to enjoy growth if the lower end of the consumer market slows. A higher level of income growth is also expected from the newlycompleted Rosebank Mall, which was funded at attractive yields, and a very enviable African expansion strategy, valued at around R2bn, has been planned.
Hyprop has done well to keep costs across the group low. The property costto-income ratio has steadily reduced from 37.3% to 34.9%. We are of the view that further eff iciencies can be extracted as the company beds down assets and reduces fund management costs
For the six-month period ended 31 December 2014, Hyprop delivered a dividend of 264c/share, an increase of 13.7% on the prior period. We maintain that Hyprop will be able to sustain this growth for the full year and are expecting distribution growth of 9.5% for 2016.