Shaky foundations limit property fund activity

THERE is expected to be limited consolidation in the listed property sector this year, with slow economic growth, share price volatility and higher financing costs dampening prospects for merger and acquisition activity.

Bond yields are also rising globally, pushing down bond prices. The listed property sector has tended to move closely in line with bonds as both are incomegenerating investments.

From the end of 2013 and during 2014, the sector experienced a large degree of consolidation, but conditions are no longer suitable for another wave of merger and acquisition activity.

Chief investment officer at Grindrod Asset Management Ian Anderson on Friday said: “Given the current levels of volatility in the sector and with bond yields rising rapidly across the globe, many companies will be rethinking their external growth strategies.

“In the past, it’s been easy to buy properties and property portfolios using a combination of equity and debt, knowing with confidence that the cost of capital would be lower than the acquisition yield of the properties.

“That’s not the case now as borrowing costs are rising with bond yields, and share prices are falling rapidly,” he said.

There are not many listed targets left for large property groups such as Growthpoint Properties and Redefine Properties to pursue. One deal that is expected to go ahead is Redefine’s takeover of Fountainhead Property Trust.

Redefine owns more than twothirds of the company’s equity and manages Fountainhead’s assets.

Another possible deal could see the takeover of Capital Property Fund by Fortress Income Fund. Capital and Fortress made a statement last month in which Fortress — which focuses on retail centres — said it was interested in acquiring all the issued shares in Capital but had yet to make an offer.

Capital owns a diversified portfolio but has focussed on industrial assets. There is speculation the fund will list its office assets sep- arately and that Fortress will buy the remaining portfolio.

Mr Anderson said the potential takeover would take time to put into place if it happened at all.

“With regards to the Fortress Capital announcement, the fact that the Capital share price has not responded to the announcement suggests the market is not convinced the deal will go ahead.”

But in the longer term, property pundits believe there will still be more consolidation. At the South African Property Owners’ Association annual conference in Durban last month, Craig Hallowes, a director of Rockcastle Global Real Estate, said many funds that had come to market with small portfolios should consolidate.

“You have seen the proliferation in the last couple of years of smaller funds coming to market now and there is that argument that the threshold size of a small fund should be R300m. I think the threshold is between R3bn to R5bn. I certainly think that smaller funds should consolidate,” Mr Hallowes said.