Buy off­shore with cau­tion

Some rand hedge real es­tate coun­ters are trad­ing at at­trac­tive dis­counts but in­vestors shouldn’t ex­pect val­ues to re­cover any time soon, writes Joan Muller

Financial Mail - Investors Monthly - - Feature -

I t wasn’t that long ago that Lon­don real es­tate play Cap­i­tal & Coun­ties Prop­er­ties (Capco), owner of trendy mixed-use precinct Covent Gar­den, was on just about ev­ery South African fund man­ager’s buy­ing list.

In 2015 Capco surged 57%, plac­ing it among one of the JSE’s top-per­form­ing stocks for that year. Ro­ma­nian-fo­cused New Europe Prop­erty In­vest­ments (Nepi) and Trade­hold, the UK and African prop­erty com­pany in which re­tail ty­coon Christo Wiese has a ma­jor­ity stake, had notched up equally im­pres­sive runs in 2015.

But last year there was a sharp re­ver­sal in the for­tunes of off­shore prop­erty stocks on the back of a stronger rand and Brexit jit­ters. This hap­pened both be­fore and af­ter the UK’s de­ci­sion to exit the EU. The Bri­tish pound lost 35.6% against the rand last year.

Un­sur­pris­ingly, coun­ters ex­posed to the UK were hardest hit. By end 2016, Capco had tum­bled more than 50% from its 2015 highs. Other UK-bi­ased stocks, such as Cap­i­tal & Re­gional, Intu Prop­er­ties, Re­de­fine In­ter­na­tional, At­lantic Leaf Prop­er­ties and Sten­prop, shed more than 30% of their value in 2016. Coun­ters ex­posed to Europe, in­clud­ing Nepi, Schroders Real Es­tate In­vest­ment Trust, MAS Real Es­tate and Sir­ius Real Es­tate were not left en­tirely un­scathed.

Out of about 20 JSE-listed prop­erty of­fer­ings that gen­er­ate 100% of their earn­ings in pounds, eu­ros or US or Aus­tralian dol­lars, only four rand hedge prop­erty coun­ters — Rock­cas­tle, Green­bay, African­fo­cused Mara Delta and In­vestec Aus­tralia Prop­erty Fund — man­aged to de­liver a pos­i­tive re­turn to share­hold­ers last year (see graph). But not even top per­former In­vestec Aus­tralia Prop­erty Fund, which boasts a 12% to­tal re­turn, came close to the 30%-plus achieved by South African-based prop­erty coun­ters such as in­dus­trial-fo­cused Equites Prop­erty Fund, SA Cor­po­rate Real Es­tate Fund, Dip­ula In­come Fund, Re­bo­sis Prop­er­ties and Delta Prop­erty Fund.

The key ques­tion is whether now is a good time to buy rand hedge prop­erty stocks at seem­ingly bar­gain base­ment prices, par­tic­u­larly given that the rand is look­ing rel­a­tively strong. More im­por­tantly, which in­di­vid­ual coun­ters of­fer the best po­ten­tial re­turns?

An­a­lysts are not con­vinced that JSE-listed off­shore prop­erty stocks will stage a come­back over the next 12 months. Bridge Fund Man­agers chief in­vest­ment of­fi­cer Ian An­der­son says in­vestors are likely to con­tinue mak­ing more money this year in their own back­yards than off­shore. “Un­less the rand weak­ens sharply, and that’s any­one’s call,” he says.

An­der­son says the tail­winds that have sup­ported global listed real es­tate over the past three years, such as low in­ter­est rates, low bond yields and low in­fla­tion, have turned into sub­stan­tial head­winds. “In ad­di­tion, the global po­lit­i­cal cli­mate has be­come un­cer­tain, par­tic­u­larly in Europe.”

How­ever, there is value to be had for in­vestors that are pre­pared to take a two- to three-year view. An­der­son says the trick is to buy stocks that of­fer good un­der­ly­ing busi­nesses, are strong op­er­a­tors in niche mar­kets and are trad­ing at siz­able dis­counts to net as­set value (NAV). He sin­gles out Ham­mer­son, Ger­man-fo­cused Sir­ius and MAS. “All three of­fer the right busi­ness propo­si­tion at the right price.” He says if you have a shorter in­vest­ment hori­zon, rather re­duce your risk by di­lut­ing your off­shore ex­po­sure through South African-based coun­ters that have only a por­tion of their port­fo­lios in other coun­tries.

An­der­son’s pre­ferred en­try points in this re­gard are Tower Prop­erty Fund, which has built a R1.3bn pres­ence in Croa­tia over the past 18 months; Ac­cel­er­ate Prop­erty Fund, which re­cently en­tered Aus­tria; and Equites. The last-men­tioned now owns three lo­gis­tic ware­houses in the UK on long lease con­tracts with, among oth­ers, Ama­zon and Tesco. “Equites has a solid South African strat­egy but also of­fers up­side through its UK ex­po­sure. Man­age­ment cut its teeth in UK real es­tate so has ex­ten­sive knowl­edge of that mar­ket.”

Ses­fik­ile Cap­i­tal di­rec­tor Kun­dayi Mun­zara agrees that the out­look for the UK and Europe re­mains tur­bu­lent given un­cer­tainty about the tim­ing of the UK’s exit of the EU and loom­ing elec­tions in France, Nether­lands and Ger­many. “Be­sides, not ev­ery off­shore prop­erty counter of­fers value at cur­rent lev­els de­spite re­cent pres­sure on share prices.”

Mun­zara refers to Nepi and Rock­cas­tle, among oth­ers, which he says are still trad­ing at steep pre­mi­ums to NAV of about 100% and 54% re­spec­tively. He says Nepi has a

Once com­pleted, cur­rent de­vel­op­ment projects in lo­ca­tions such as Ed­in­burgh will add fur­ther in­come-gen­er­at­ing as­sets to the port­fo­lio at bet­ter yields

strong de­vel­op­ment pipe­line, imbed­ded rental up­side and po­ten­tial cap rate com­pres­sion that could per­haps jus­tify a lot of this pre­mium. “How­ever, if you com­pare these pre­mi­ums with Intu Prop­er­ties and Ham­mer­son, which are trad­ing at around a 30% and 20% dis­count to net as­set value re­spec­tively, it’s clear that the dif­fer­en­tial in val­u­a­tions may not be sus­tain­able.”

Mun­zara says Ses­fik­ile’s top JSE-listed off­shore pick for 2017 is In­vestec Aus­tralia Prop­erty Fund. Not only is Aus­tralia now one of the most sta­ble regions in the world, both eco­nom­i­cally and po­lit­i­cally, the com­pany has a sim­ple busi­ness model that’s easy to un­der­stand, with a strong as­set man­age­ment team on the ground. “We place high value on lo­cal teams with lo­cal knowl­edge.”

Ses­fik­ile also likes In­vestec Aus­tralia Prop­erty Fund’s strat­egy to buy of­fice and in­dus­trial build­ings in sec­ondary nodes on the fringes of ma­jor ci­ties such as Bris­bane, Mel­bourne and Syd­ney. “You can still buy qual­ity stock on the out­skirts of Syd­ney at yields of about 7.5% and se­cure debt fund­ing at around 4%. That’s at­trac­tive, con­sid­er­ing that Syd­ney is ar­guably one of the world’s strong­est of­fice mar­kets now.”

How­ever, Mun­zara ar­gues that for re­tail in­vestors it prob­a­bly makes more sense to ac­cess off­shore prop­erty mar­kets through a di­ver­si­fied unit trust fund than buy­ing into in­di­vid­ual JSE-listed off­shore prop­erty stocks. “The last-men­tioned tend to be ex­posed mainly to the UK and Cen­tral and Eastern Europe, with barely any US ex­po­sure. And to limit your­self to one re­gion in the cur­rent un­cer­tain po­lit­i­cal and eco­nomic cli­mate can be risky, ” Mun­zara says.

Me­tope In­vest­ment Man­agers CEO Lil­iane Barnard says that in the cur­rent pe­riod of cur­rency volatil­ity the com­pany prefers off­shore stocks that of­fer strong growth prospects in hard cur­rency.

She sin­gles out MAS as Me­tope’s top pick for 2017. “MAS pro­vides in­vestors with ex­po­sure to the de­vel­oped mar­kets of the UK and West­ern Europe, in­clud­ing Ger­many and Switzer­land, as well as the emerg­ing CEE re­gion through a 40% stake in Prime Kap­i­tal.”

Prime Kap­i­tal was founded by Martin Slab­bert and Vic­tor Semionov, who built up a strong de­vel­op­ment track record in the re­gion dur­ing their ten­ure as former CEO and fi­nan­cial di­rec­tor of Nepi.

Barnard says MAS is able to ex­e­cute on its strat­egy of grow­ing and sus­tain­ing div­i­dend pay­outs through a high­qual­ity port­fo­lio of de­vel­op­ment as­sets as well as ex­ist­ing, in­come-gen­er­at­ing prop­er­ties. “Once com­pleted, cur­rent de­vel­op­ment projects in key lo­ca­tions such as Ed­in­burgh will add fur­ther in­come-gen­er­at­ing as­sets to the port­fo­lio at bet­ter yields than MAS is likely to achieve if it had to buy prop­er­ties in the open mar­ket,” Barnard says.

Keillen Ndlovu, head of listed prop­erty funds at Stan­lib, also favours MAS, as well as Ham­mer­son. “MAS is ex­pect­ing high dou­ble-digit growth for the next two to three years. To achieve this, man­age­ment is will­ing to sac­ri­fice salaries and bonuses for the next five years or so through a pro­posed de­ferred re­mu­ner­a­tion scheme,” Ndlovu says.

Ham­mer­son, whose shop­ping cen­tre port­fo­lio has a 60% ex­po­sure to the UK and a 40% ex­po­sure to Europe, mostly through France, the Nether­lands and Spain, also of­fers an at­trac­tive buy­ing op­por­tu­nity at cur­rent lev­els

. “Ham­mer­son has a great port­fo­lio and man­age­ment team and good earn­ings growth out­look, and it is trad­ing at a dis­count to NAV,” Ndlovu says.

He says there is no doubt that rand hedge prop­erty stocks now of­fer bet­ter value than 12 to 18 months ago. “But in­vestors will have to be­come far more dis­cern­ing in their stock se­lec­tion than be­fore. The days of us­ing a shot­gun ap­proach are over.”

Kun­dayi Mun­zara … not ev­ery off­shore prop­erty counter of­fers value


Keillen Ndlovu …in­vestors have to be dis­cern­ing

TO­TAL RETURNS COMPARED (2016) Off­shore prop­erty coun­ters Lo­cal prop­erty coun­ters Indices *New off­shore list­ings SOURCE: Bloomberg & Ses­fik­ile Cap­i­tal

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