Going offshore to beat the rand
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.