Consolidation to sweep SA's listed Property Sector
With little room left for growth and the desire to attain size, liquidity and attract institutional investors, South African Real Estate Investment Trusts (REITs) are looking increasingly to merge with others that have similar portfolios.
Corporate activity in the listed property sector is expected to continue with indications that a number of property counters could diminish further because of the shortage of quality fixed properties available, SA Commercial Prop News has learnt.
Redefine Properties, SA’s second biggest Real Estate Investment Trust (Reit) recently got its hands on a strategic stake in, once ugly duckling, Emira Property Fund.
This may prove to be the salvo the industry needs before we see 2015.
Emira has become a middle income fund, post-recession. Tenacious CEO James Templeton has held a steady hand over the fund which holds assets that are a balanced mix of retail properties and offices.
Redefine has a market value of R33bn, and Emira has a market value of R8bn.
The 11% stake costed Redefine R880m. Chairman and one of SA’s most revered dealmakers, Marc Wainer, told SA Commercial Prop News that Emira could become a takeover target in the future.
“We would have liked more than 11% but it’s the beginning. I really like how Emira has turned itself around under steady leadership,” Mr Wainer says.
Emira’s portfolio contains 141 properties and is valued at R10.8bn. Emira also owns part of the Australia Stock Exchange-listed Growthpoint Properties Australia. Its stake there is worth R666m.
Templeton says overseas exposure has proven to be extremely useful for the group. It seems SA’s property funds are not afraid to buy into other funds abroad. Some SA Reits may try to consolidate with funds that have foreign exposure. But he also says domestic assets are critical to Emira.
Resilient Property Income Fund has used its clout in the market to become something of a pioneer. Led by property doyen, Des de Beer, the fund owns stakes in New Europe Property Investments (Nepi) and Rockcastle Global Real Estate Company (Rockcastle).
Nepi is the dominant player in shopping centres in Romania. Last year, it was the top performing listed property fund on the JSE managing 56.5%.
Rockcastle has a history of investing in property indirectly by buying stakes in listed property groups. However, it has recently committed itself to buying property itself.
CEO Spiro Noussis and De Beer have fallen in love with East Europe’s Poland as an investment destination. The country which routinely outperforms other economies in that part of Europe is their major European target.
Tie-up between sister companies, Octodec Investments and Premium Properties went through last month, with the combined fund set to attract a market capitalisation in excess of R5bn.
Redefine's purchase of R2.1bn takeover of Annuity Properties, was approved in June.
In July, Arrowhead Properties announced it had been approved to buy the entire units in Vividend Income Fund from Stanlib.
Mergers on the Cards
One merger which could be on the cards is SA’s largest listed Reit, Growthpoint Properties gaining control of Acucap Properties and Sycom Property Fund when they have merged.
Growthpoint has a market value of about R58bn while Acucap is valued at about R11bn and owns 98% of Sycom. If Growthpoint manages to pull it off, it will be an enormous fund relative to the sector which will be worth a bit over R300bn by market value.
Growthpoint and many other funds became Reits last year with various goals in mind. Reits use similar tax dispensation as funds abroad do. The intention was to become Reits and then gain institutional investment from overseas for the small but growing South African listed property sector. This international pick up has not been forthcoming yet, so Growthpoint has to try hard to find good acquisitions which make sense for it. Acucap-Sycom would be sizeable enough for the sector giant.
Deals that Fell Away
A number of mergers fell away this year, such as Vukile Property Fund’s proposed takeover of Synergy Income Fund. Vukile, like many other funds sees the appeal in shopping malls, and Synergy has some very appealing ones which are located in rural areas and townships.
Redefine Properties also emerged as the victor in the long-running takeover battle with Growthpoint Properties for Fountainhead Property Trust assets, but had fallen short of taking home the prize.
Black-managed stocks Rebosis Property Fund, Ascension Properties and Delta Property Fund proposed triple merger was also called off earlier this year and it cost the funds involved. The leaders of the funds cited bad timing. It may have been a case of managing egos. The merged Broad-Based Black Economic Empowerment powerhouse could have only had one CEO.
Conclusion
As long as there is hunger for liquidity in the listed property sector however, much of this M&A activity could be revived. The giants that are Growthpoint and Redefine are so much bigger than the other property counters and much more liquid. SA’s fund managers will not appreciate it if this goes on for to long.