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Smaller property funds takeover frenzy


THERE could be consolidation at the lower end of the listed property sector according to market commentators.

Listed property has been the most active sector on SA’s JSE bourse in terms of equity raises and new listings this year to date, reports Ortneil Kutama, SA Commercial Prop News Media Director.

Stanlib’s head of listed property funds, Keillen Ndlovu, has said that R16bn worth of equity was raised in 2011, R11bn in 2012 and R18bn in 2013. A tremendous R40bn was raised in 2014 and in the year to date, more than R25bn has been raised.

“One would expect some smaller listed property funds to club together and merge. Having funds that have market caps of around R1bn is not attractive, especially now when investors are seeking liquidity,” he said.

Grindrod Asset Management’s chief investment officer, Ian Anderson agrees its consolidation time.

"There are a few companies currently trading on large premiums to net asset value and a number of take-out targets trading at discounts to net asset value. I’d say we’re ripe for consolidation,” he said.

He says this will make share swap transactions attractive.

It is unlikely that the larger property funds will opt for takeovers right now. Growthpoint Properties, the biggest South African based property fund with some R100bn worth of assets, just cannot find large enough, quality asset to acquire. Redefine Properties however is keen to take over Emira Property Fund.

Chairman Marc Wainer says he is eyeing the diversified property owner. Emira’s long standing CEO James Templeton recently left the fund. This could create a takeover opportunity for Redefine which already owns over 11 percent of Emira.

Emira’s share price has actually trebled in the past five years from about R3 to about R9 which shows that Emira has had an attractive run which is part of why Redefine has courted it.

Tower Property Fund could also be a takeover target. This fund has a very strong and diverse portfolio. Many funds will want to buy exposure to Tower’s Cape offices.

Another fund which could try to make more acquisitions is Arrowhead Properties. Arrowhead is expected to continue its pursuit of Dipula. This is because Dipula has desirable retail assets. But Dipula’s CEO Izak Petersen says he won’t give up his stake easily.

Arrowhead CEO Gerald Leissner and chief operating officer Mark Kaplan, have said Dipula is a strong fit for their fund.

Dipula’s exposure to retail is nearly 60% of its fund, while offices account for about 20% and industrial make up 20%. These assets are spread across SA, which would extend Arrowhead’s national footprint. Arrowhead has not consolidated with another fund for ages and there could be some pressure on Arrowhead to make a merger.

Smaller funds which could merge include Freedom Property Fund, Equites Property Fund and even Stor-Age Properties after it lists. Freedom and Equites both have exposure to industrial properties which are coming into en vogue such as distribution warehouses and centres. Stor-age will be the first self-storage based real estate investment trust on the JSE.

Many property companies have listed on the JSE over the past couple of years but most have not been specialised. Nevertheless, investors have responded positively to news of a specialised real estate investment trust (Reit) with such an interesting focus joining the JSE. Stor-Age, which has been in existence for 10 years and has touted a listing for about two, offers a defensive alternative to offices, industrial and retail properties.

Stor-age CEO Gavin Lucas says he is confident the listing will be successful and that it is a good time to join the JSE. Stor-age has accumulated assets across the country which are situated near major metropolitan areas. Lucas says his company is targeting the middle class of SA, especially the black class.

One company which might not consolidate soon is Delta Property Fund. Delta owns a significant in Delta Africa, the first pan African property investment Reit on the JSE. Delta has a strong government underpin which is attractive. For this reason companies may want to buy it to be exposed to a fund that manages good government relationships. But many funds are shying away from buying in SA and funds exposed to SA because returns are more attractive in the UK, Germany and the US. Also, for a takeover to happen, Delta’s external management company would have to be onboard.

According to Catalyst Fund Managers’ recent Global Listed Property Review for September, the South African Listed Property index achieved a 13.26% total rand return in the first nine months this year, short of the world’s average of 15.43%.

This suggests that funds will be extra-sensitive to the price at which they buy other funds.

Importantly many companies are selling properties worth less than R100m so funds with smaller assets which they are struggling to manage, may become takeover targets.