Hyprop: Qual­ity re­tail prop­erty pays div­i­dends

Finweek English Edition - - INSIDE - BY NESI CHETTY Head of Prop­erty at Mo­men­tum As­set Man­age­ment

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.

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