Consolidation seen in property
ANALYSTS believe that over the next six to 18 months there will be consolidation in the property sector following the rash of new listings over the past three years.
ANALYSTS believe that over the next six to 18 months there will be consolidation in the property sector following the rash of new listings over the past three years.
There have been 17 property listings in that period, according to the JSE. In 2003 and 2004 there was also a slew of listings, followed by a cooling-off period with significant consolidation when larger listed property stocks acquired their smaller peers. This is set to repeat itself when the ability to raise capital in the form of equity becomes much easier, say analysts.
“We are expecting some consolidations to happen in the sector, particularly in the smaller names where capital is scarce, these funds will have to resort to corporate action in order to grow,” Investec analyst Peter Clark said yesterday.
“The cost of capital, both equity and fixed debt, has increased which makes acquisitions of direct property less attractive as the direct market takes time to adjust pricing expectations,” he said.
Property investments globally are under pressure from high bond yields. The yields of listed property and bonds are highly correlated as they are both income-generating investments and investors allocate capital between them.
South African investors who invested in offshore property stocks have enjoyed a currency exchange advantage over those with interests in South African-based stocks.
The rand has weakened drastically this year, falling about 15% against the dollar.
Imara SP Reid analyst Warwick Lucas said it was likely a consolidation period would occur.
“I certainly think it’s realistic. I mean there will always be individual reasons for a business to list. Participants in a sector will be that much more inclined to list if they regard their sector to be highly rated relative to others.
“Also, property stocks are loosely related to the interest rate cycle, and it seems very unlikely that interest rates will (go) any lower for an extended period of time,” he said.
Interest rates are at the lowest 30-year level in SA.
We are expecting consolidations in the sector, particularly in the smaller names where capital is scarce
JSE-listed Arrowhead Properties chief operating officer Mark Kaplan said yesterday that while he believed debt funding for property acquisitions was “doable”, obtaining equity funding was “much more difficult”.
“We could see consolidation in the next six to 18 months,” he said.
This year’s new listings have included Delta Property Fund, GO Global Properties and Tower Property Fund.
Mr Clark said the environment for raising equity for smaller funds had also changed this year.
“This is not as easy as it was six months ago, a trend we foresee persisting. As funds are stuck in positions where they cannot raise capital and/or find attractive acquisitions, consolidations are likely to drive growth,” he said.