Investors eye Europe property
THE local listed property sector outperformed the equity and bond markets this week in response to a temporarily stronger rand and lower bond yields.
But if the rand continues to weaken and bond yields continue their broader trend of strengthening, South African listed property will continue to lose ground. However, local investors who want to compensate for this are increasingly investing in overseas listed property companies with exposure to developed markets.
Touting his European portfolio as a useful rand hedge, Redefine International CEO Mike Watters recently presented some of the company’s assets to analysts, brokers and journalists, including three new acquisitions in Germany worth à189- million (about R2.4billion).
This brings Redefine International’s European portfolio to a value of à420- million. The company has been granted permission by the Reserve Bank for an inward listing and its simplified structure and internal management will give South African investors exposure to these assets.
Redefine Properties International — until now a necessary but cumbersome structure — will delist and Redefine International will become a real estate investment trust option alongside 34% shareholder Redefine Properties.
What is the true value to local investors? According to Stanlib property analyst Ndabe Mkhize, those companies that hold European assets that are not overrented are well poised for the future.
“Valuations are trading in line with long-term averages and their yields are higher than current bond yields. When bonds correct upwards, they won’t experience so much pain. However, in South Africa, listed property yields already sit below bond yields and long-term averages, so they will suffer when bond yields rise.
“The currency also has an impact, and while its movements are difficult to predict, the rand is expected to weaken and when money flows out of emerging markets, rand returns will not look great,” Mkhize said.
Macquarie real estate analyst Leon Allison agreed that although Europe was a tough environment and even in stable Germany GDP growth would not be spectacular, there were signs of improvement. “On a macroeconomic level, Germany appears to be the most defensive territory.”
It seems a good idea to have an element of offshore exposure. The South African retail investor’s options will soon include Redefine International, New Europe Property Investments (Nepi) and Intu, as well as some smaller options such as GoGlobal. They are not like-forlike options.
“They’re in different markets, with Intu in UK regional shopping centres at the urban fringes, while Nepi specialises in Romanian retail and Redefine International is split across the UK and Germany and is not sector-focused,” said Mkhize.
Although Nepi has been successful by sticking to what it knows, Mkhize said Intu had not made the best use of the best assets on paper and its share price trading below its net asset value reflected this.
“Their income has been heavily affected by tenant administrations. So, you have to ask how strong are the assets? There have been lots of vacan-
It seems a good idea to have an element of offshore exposure
cies, which have put a ceiling on the fund’s growth. A good fund should have a string of potential replacement tenants to replace them easily. Complaining of tenant failures means Intu’s assets don’t look defensive enough.”
Mkhize said Redefine International lay somewhere in the middle. “It has good tenants, but this has not always been borne out in performance. The company is moving forward and has learned some lessons — primarily about taking on too much debt and buying assets at high prices, which hurt it.”
Watters said his current tasks included keeping debt levels down by making opportunistic acquisitions where occupants are not overrented and by renegotiating finance deals — something that has been borne out in recent moves.
Redefine International pays out all income to shareholders in distributions — something he hopes will change. “We hope to gradually withhold more and gear less, growing value through rental increases from unlocking value in turnaround projects at our sites.”
Watters wants to see a growth spurt that will catapult Redefine International into the FTSE 250 and All Share, as well as inclusion in the European Public Real Estate Association, which would pave the way for more institutional involvement.
The company’s recent acquisitions bear out its short-term strategy of lowering the cost of capital. Watters said Redefine International was paying 2.5% to 3% on capital and getting up to 8% yield on some properties.
He has made some shrewd moves on the assets of distressed sellers and has also offloaded non-core assets and refined others as the company has strengthened its portfolio.
Although Redefine International has also invested in the Cromwell Property Group in Australia, it is its opting to focus on Germany with its stable economy — a sizeable portion of the German portfolio includes government departments — and the UK, whose economy Watters said had turned a corner, that looks like a sensible move to attract investors seeking a defensive income source.