Listed prop­erty still the one to beat Stan­lib’s Keillen Ndlovu dis­cusses why this as­set class has re­tained its po­si­tion at the head of the pack.

Finweek English Edition - - FUNDFOCUS -

growth in this sec­tor is slow­ing down sig­nif­i­cantly but it con­tin­ues to pip all other as­set classes. De­mand for listed prop­erty has been sup­ported by, among other fac­tors, a search for yield, strong merg­ers and ac­qui­si­tions ac­tiv­ity, new list­ings, diversification into off­shore mar­kets, and bet­ter-thanex­pected earn­ings growth. Off­shore prop­erty as­sets now make up about 40% of the South African Listed Prop­erty In­dex.

Leon Kok spoke to Stan­lib head of listed prop­erty funds, Keillen Ndlovu, about the sec­tor’s prospects:

Is the listed prop­erty party over in SA?

Al­though cur­rent mar­ket per­for­mance is noth­ing like it has been dur­ing the past decade, it cer­tainly isn’t sink­ing into obliv­ion. An­nu­alised cap­i­tal ap­pre­ci­a­tion is down con­sid­er­ably, but earn­ings are still hold­ing up. It re­mains the best­per­form­ing as­set class in SA in the year-to-date and over the years.

What do you put this down to?

Prop­erty in­come growth has slowed down due to the more de­pressed econ­omy, but this has been sig­nif­i­cantly off­set by diversification into de­vel­oped mar­kets such as UK, Europe and Aus­tralia as well as the rest of Africa.

Will the do­mes­tic listed prop­erty sec­tor be able to hold up in the cur­rent low growth eco­nomic en­vi­ron­ment?

Yes, I be­lieve so. It is con­sid­er­ably more de­fen­sive than eq­ui­ties and has shown just over 20% com­pound growth dur­ing the past 15 years and is cur­rently grow­ing at around 8% this year. How­ever, most of this is in­come-driven with only lim­ited cap­i­tal growth. Earn­ings have never been neg­a­tive since 1994.

When times are tough, busi­nesses cut down on spend­ing, but one thing they don’t usu­ally com­pro­mise on is space.

What are your ex­pec­ta­tions for your do­mes­tic ve­hi­cle, the Stan­lib In­come Prop­erty Fund, over the next five years?

to a to­tal an­nual re­turn of about 8% to 10%, mainly in­come driven. There is a cur­rency el­e­ment to it, but you get diversification that will mit­i­gate it to some de­gree. Some 40% of the in­come is sourced from out­side SA.

What are your views on do­mes­tic of­fice, re­tail and in­dus­trial prop­erty re­spec­tively?

Of­fice prop­erty is per­haps fac­ing the big­gest chal­lenges of the three at present, nat­u­rally a con­se­quence of the strug­gling econ­omy, con­sid­er­able sup­ply com­ing through, and ten­ant con­sol­i­da­tion. For ex­am­ple, larger groups such as Dis­cov­ery and Sasol will be con­sol­i­dat­ing from var­i­ous build­ings into sin­gle lo­ca­tions. Oth­ers have con­sol­i­dated into more mod­ern, flag­ship build­ings.

Pres­sure, in turn, has been placed on rentals of lower-grade build­ings, with many hav­ing to pro­vide in­cen­tives to re­tain their ten­ants. I don’t see much over­all rental growth for at least the next three years.

Re­tail prop­erty has done sur­pris­ingly well in re­cent years, but is also im­pacted by the con­sid­er­able sup­ply com­ing through. The most sig­nif­i­cant ex­am­ple is the Mall of Africa, which opened in Midrand re­cently with 131 000m2. It’s af­fect­ing most neigh­bour­ing shop­ping cen­tres.

Fi­nally, in­dus­trial prop­erty is do­ing rea­son­ably well at present, driven to some ex­tent by re­tail de­mand for ware­house space (dis­tri­bu­tion and lo­gis­tics). How­ever, rental growth will be lim­ited in the fore­see­able fu­ture. Va­can­cies are around 4%.

What are the prospects for the emer­gent res­i­den­tial listed prop­erty sec­tor?

but it’s more fo­cused on de­vel­op­ing res­i­den­tial as­sets.

What is your view on the rand hedges in the sec­tor?

Sev­eral of them have per­formed ex­cep­tion­ally well. Most im­pres­sive among them has been Nepi [New Europe Prop­erty In­vest­ments], which con­tin­ues to gen­er­ate con­sid­er­able growth in Ro­ma­nia. This has been driven by a pipe­line which at some point may slow down. The growth will then have to be gen­er­ated or­gan­i­cally from ex­ist­ing as­sets. Re­de­fine is also in­ter­est­ing, es­pe­cially with its re­cent Pol­ish ac­qui­si­tion. Poland, in­ci­den­tally, is the strong­est econ­omy in Eastern and Cen­tral Europe.

What are your pre­ferred sec­tors and funds within your broad port­fo­lio?

Off­shore, in­clud­ing emerg­ing mar­kets.

The Stan­lib Global Prop­erty Fund is per­haps top of my list at present.

It’s a fund fo­cused on global de­vel­oped mar­kets, prop­erty com­pa­nies and re­lated se­cu­ri­ties and has per­formed well above its sec­tor av­er­age in re­cent years. The to­tal re­turn dur­ing the past year has been well above 25% in rand.

How have you achieved that in the rel­a­tively de­pressed global in­vest­ment en­vi­ron­ment?

Al­pha is cre­ated by pick­ing in­trare­gional stocks as op­posed to ge­o­graphic tilts, as we would rather elim­i­nate a largely un­playable vari­able in cur­rency calls. We cur­rently hold 87 stocks (com­pared with the S&P Bench­mark with over 200 stocks). Big­gest ex­po­sure is to the US at 58%, fol­lowed by UK and Europe at about 10% each.

The fund has a strong bias to­wards in­vestors rather than de­vel­op­ers; we pre­fer com­pa­nies that gen­er­ate above-av­er­age growth in their rentals streams. Our fo­cus is on stocks that are un­der­pinned by ro­bust cash flows that are mostly rein­vested into the fund on a reg­u­lar ba­sis.

Keillen Ndlovu Head of listed prop­erty funds at Stan­lib

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