South Africans are looking further afield than Europe for property, writes Johann Barnard
South Africans are looking further afield than Europe for property
Exposure to offshore property has become a popular theme for local investors looking to diversify outside SA. Property’s main appeal lies in comparatively lower risk and regular income. And, for the most part, investors have been rewarded.
At least, that was the case until Resilient Reit became the fly in the ointment that caused SA-listed real-estate investment trusts (Reits) to shrink more than 17% this year to endJuly, against a 1.9% contraction in the JSE all share index. The group has been accused of manipulating its value through convoluted cross-shareholdings, and its share price plunge has hurt the industry.
It has also hurt investors who piled into locally listed Reits for their rand-hedge qualities: more than 50% of these Reits have exposure to global markets.
Resilient’s troubles and the sharp decline in the index are not a reflection of the state of the industry, nor of the opportunity presented by these externally focused funds. Historically, SA listed property has been the top-performing asset class over the past three-, fiveand 10-year periods.
The sector’s recent speedbump is not necessarily bad news, argues Investec Asset Management’s Peter Clark.
“The issues experienced around the Resilient group have acted as a catalyst for extended valuations to normalise,” he says. “This was particularly the case in a number of East European-focused companies that traded at high premiums to NAV.
“The events have also brought to light a number of unsustainable earnings practices which have, on the margin, been inflating earnings in the sector. We are seeing a number of companies resetting the base here.”
The dip in the sector’s performance this year should hopefully be little more than a correction, and one that longhaul investors should be able to absorb.
A fund that has avoided the dip is the Fairtree Global Real Estate Prescient Fund. It reported in April that its fund was up almost 10% in US dollar terms, beating its benchmark by 4%.
“Because of the experience with global property funds, South Africans have started looking overseas for better opportunities, whether in the UK or Central and Southern Europe,” says Rob Hart, comanager of the fund. “And that’s opened their eyes to the other opportunities around the world.
“Hopefully that journey is going to continue and they will start looking at other markets, like the US and Asia.”
The rand-denominated fund offers direct exposure to listed property groups in the US (50% of the exposure), Asia including Australia (30%), and Europe and the UK (20%).
Hart’s partner in the fund, Ryan Cloete, says the composition of the portfolio offers added diversification for SA investors.
“The SA Reits’ offshore exposure is predominantly concentrated in Southern and Central Eastern Europe, whereas we’re looking at the whole developed world. You have to consider the riskreturn profile. There are definitely opportunities in Central and Southern Europe, but a lot of those are actually emerging markets themselves.
“The problem is it becomes like a treadmill because you have to keep on making acquisitions to keep your growth up. And, broadly speaking, a lot of offshore expansion has been funded by debt and some structures are highly indebted.
“So now we’re in an environment where some local Reits can’t expand because they don’t have balance-sheet capacity any more. What they need now is equity injection, and at the current pricing levels it would be dilutive. So they’re kind of caught in a catch-22.”
The areas in which Fairtree sees opportunity for investors looking at global property include Asia, and exclude retail.
The latter is almost a nobrainer, given the pressure that conventional retail space is under from the e-commerce boom. “Now, that is good for industrial but bad for retail,” says Hart.
This has informed the fund’s strategy in markets like the UK, where you might expect to find fewer opportunities given the Brexit uncertainty.
“We don’t like UK office or UK retail, which leaves you with a couple of niche sectors and we’re overweight those sectors,” he says. “This includes industrial and we also like selfstorage in the UK.”
Fairtree’s Asia fascination stems from Hart’s experience working in that market for 20 years.
He explains that exposure there offers not only geographical diversification but also access to a greater weighting of developers that make up the market.
Judging by this year-old fund — it has grown assets under management to R55m so far — property retains its allure. And more options to gain global exposure can only be good news for investors.
Ryan Cloete … Portfolio diversification
Rob Hart … Experience in Asia