Go­ing off­shore to beat the rand

Finweek English Edition - - COVER STORY -

Some of SA’s largest prop­erty funds, or REITs, have in­vested bil­lions of rand in off­shore prop­erty in a bid to di­ver­sify their in­come. Some of th­ese in­vest­ments have been tar­geted at emerg­ing mar­kets in the EU, while oth­ers have looked to de­vel­oped mar­kets such as Aus­tralia, the UK and Ger­many for re­turns. But were th­ese wise moves?


Growth­point Prop­er­ties made a R4.9bn in­vest­ment in the Aus­tralian prop­erty mar­ket by ac­quir­ing Or­chard In­dus­trial Prop­erty Fund in July 2009 and re­cap­i­tal­is­ing the com­pany.

“The Aus­tralian econ­omy is sim­i­larly af­fected to South Africa,” says Zayd Su­laiman, a fund man­ager at Cat­a­lyst As­set Man­age­ment, with ref­er­ence to the col­lapse in com­mod­ity prices over the past year. “They are, how­ever, a lot more de­vel­oped than SA.”

Growth­point ben­e­fit­ted from the weak­en­ing rand over the past two years, says Su­laiman who doesn’t ex­pect the lo­cal cur­rency to sud­denly strengthen against de­vel­oped cur­ren­cies, such as the Aus­tralian dol­lar, soon.

“Ev­ery­body says the rand is over­sold and should strengthen, but the re­al­ity is there is no cat­a­lyst for the rand to rerate with all our lo­cal is­sues,” he ex­plains.

Over the medium to long term, Su­laiman ex­pects distri­bu­tion growth from Growth­point’s Aus­tralian busi­ness to be more closely linked to Aus­tralian in­fla­tion. The Re­serve Bank of Aus­tralia fore­casts con­sumer price in­fla­tion to be be­tween 1% and 2% for the rest of this year, ac­cord­ing to its lat­est mon­e­tary pol­icy state­ment.

New Europe Prop­erty In­vest­ments

New Europe Prop­erty In­vest­ments (Nepi) made its maiden ac­qui­si­tion in 2007 by pur­chas­ing a port­fo­lio of four re­tail prop­er­ties in Bucharest, Ro­ma­nia. By the end of that year, it bought an in­dus­trial and of­fice fa­cil­ity in another city in the Eastern Euro­pean coun­try. Ever since, the com­pany has been ac­tively buy­ing prop­er­ties in Ro­ma­nia, Ser­bia and Slo­vakia and de­vel­op­ing large re­tail as­sets, such as Bucharest’s Mega Mall.

“They were the first movers from South Africa that went into Europe,” says Su­laiman. “They’ve done tremen­dously well.”

The com­pany es­tab­lished lo­cal part­ners and plat­forms and has a “qual­ity team” on the ground, ex­plains Su­laiman. Nepi en­tered the Eastern Euro­pean mar­ket when no one else was re­ally fo­cus­ing on the area, he says.

Nepi has grown its prop­erty port­fo­lio from an ini­tial €21.7m by the end of 2007 to €1.8bn by the end of last year, ac­cord­ing to the com­pany’s an­nual re­ports. By the end of last year, Nepi had plans to in­vest a fur­ther €601m in new de­vel­op­ments and re­de­vel­op­ments of prop­er­ties.

“There is lim­ited an­nual rental growth as in­fla­tion is very low,” ex­plains Su­laiman. “They’ve got to be do­ing deals and de­vel­op­ments all the time to be able to gen­er­ate high growth, as there is lim­ited or­ganic growth com­ing from core prop­erty net in­come un­til leases ex­pire and the com­pany has the abil­ity to in­crease rentals based on higher ten­ant turnover num­bers.”


Re­de­fine owns a 30.1% stake in Lon­don-listed Re­de­fine In­ter­na­tional plc, a 25% stake in Aus­trali­abased Cromwell Prop­er­ties, and ac­quired a 75% share­hold­ing in Pol­ish Echo Prime Prop­er­ties this year for ap­prox­i­mately €362m. The com­pany plans to re­duce its stake in the Pol­ish ven­ture to 50% in due course. “It’s done very well re­cently to im­prove its port­fo­lio qual­ity,” says Su­laiman. “Its ex­po­sure to Aus­tralia and the UK via the weak­en­ing rand helped min­imise the di­lu­tive im­pact of this port­fo­lio re­struc­tur­ing.” Eco­nomic growth in Poland is very low, with sub­se­quent lower ex­pec­ta­tions for rental in­come growth, ac­cord­ing to Su­laiman. “Gen­er­ally, it ap­pears the dan­ger is that South Africans with lim­ited ex­pe­ri­ence in Europe are buy­ing prop­er­ties in Europe at prices Euro­peans don’t want to pay,” says Su­laiman. “We’re pos­si­bly over­pay­ing, but time will tell.” The fact that ac­qui­si­tions in Euro­pean mar­kets could be funded at all-time low in­ter­est rates in Europe doesn’t mean a prop­erty fund should buy at all-time low yields, he ex­plains. "Pric­ing should be based on where ex­pec­ta­tions of long-term in­ter­est rates should set­tle. How­ever, the whole world is chas­ing yield and thus driv­ing prices up. Man­age­ment teams also need to be aware of the mis­match­ing of cur­ren­cies. In many ju­ris­dic­tions, leases and debt are in eu­ros, but lo­cal cur­ren­cies aren't. It does add an ad­di­tional el­e­ment of risk that needs to be pro­vided for.”

The Ga­le­ria Echo shop­ping cen­tre in Kielce, south­ern Poland, is owned and man­aged by Echo In­vest­ments.

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