Offshore Companies take the lead in SA’s Listed Property

The South African Listed Property sector is wading off many challenges including a weak economy, a volatile rand and tenant struggles. Much of the sector is now offshore which is providing support to investors returns.

The listed property sector has had a very challenging 2017 but despite a lack of merger and acquisitions and new listings, the companies within it have generated solid returns.

In the first ten months of this year, listed property returned nearly 11%. Equites managed to achieve double this number however, according to a report by Catalyst Fund Managers.

"Much of the value created by South African listed property groups has been made abroad. About 40% of the listed sector is offshore," said Ortneil Kutama, SA Commercial Prop News Media Director.

About half of that 40% is in eastern Europe. Poland, which is one of the most popular investment markets in Europe has drawn the attention of South African investors. Poland is very fast growing. This year New Europe Property Investments (Nepi) which has focussed on Romania merged with Rockcastle Global Real Estate which has focussed on Poland. They became a fund called NEPI Rockcastle PLC with a market capitalisation of about R100bn.

NEPI Rockastle is spreading itself across eastern Europe, owning assets in Poland, Romania, Czech Republic, Hungary, Croatia, Slovakia, Bulgaria and Serbia. They bought a shopping centre in Poland this past week. The company is worth about R115bn, with its share price having climbed %.

Redefine Properties is also increasing its exposure to Poland. The company has recently announced a deal where it is acting as part of a consortium.

Redefine which is the second largest SA-based property group, will acquire a 25% stake in a €1bn retail portfolio of 28 well-established assets in Poland.

CEO Andrew Konig has said Redefine will co-invest in a consortium with American investment management firm, Pacific Investment Management Company (Pimco), and American asset manager Oaktree Capital Management, each of whom would have 37.5% of the portfolio being acquired.

Following this latest Polish deal, Redefine’s exposure to offshore real estate will be add much as 30%. Apart from Poland, the company has investments in the UK and Australi.

Emira Property Fund has become the first South African Reit to invest in the US.

Emira’s US investment plan involves partners in the largest real estate investment trust (Reit) market in the world. Emira gets 6% of its income from its investment in Growthpoint Properties Australia. By investing in the US, it wants its income derived from offshore assets to expand to at least 10%. Emira and its partners will invest in grocery-anchored convenience retail centres.

Having considered several investment destinations, we identified the USA as being the best fit for us. It is the primary first-world market and the US dollar is the world’s benchmark currency

The US is the largest and most sophisticated Reit market on earth. Emira believes as a western economy, it is offering strong growth prospects currently.

"As the biggest market in the western world, it is extremely solid and well diversified, plus we see attractive value in our chosen segment,” said CEO Geoff Jennett earlier this year.

Emira is committing R290m to its first investment in the USA, which is only about 2% of its total assets.

“We can comfortably fund this from our own balance sheet and furthermore we can take advantage of access to relatively cheap, in-country, long-term debt finance," he said.

The investment will earn Emira’s stakeholders US dollar-denominated double-digit returns of some 10.5% per annum, compared with the single-figure yields achievable in SA.

Emira will also co-invest with Rainier Companies, a Dallas, Texas-based investment and real estate business, which is headed by Texan J Kenneth Dunn, its co-founder and principal.

This may prompt more South African funds to invest in the US but only if they can create the correct partnerships with people in the market first.

It is also currently results reporting season for various listed property funds. Unfortunately, their dividend forecasts have been rather disappointing.
Octodec recently reported that it had grown its dividend per share 0.8% in the year to August. It guided for 0% growth in the next financial year saying maintaining a dividend was still attractive.

This was also less than the 1% growth in dividends it achieved in a six-month period in 2009, one of Octodec’s weakest periods on record.

MD Jeffrey Wapnick has said the second half of the August 2017 financial year was disappointing as the group faced new competition in Pretoria, especially in Hatfield, which was being redeveloped. The economy was weak and consumers were under pressure, Wapnick said.

Student housing is being built with pace in Hatfield and Pretoria. There is even a company which is trying to list as a student housing fund and become a real estate investment trust. This group is Inkunzi Student Accommodation. It is struggling to list as it looks to raise capital and meet requirements with the JSE.

Investors are still hungry for specialised funds, there have just been concerns over political uncertainty in SA and a weak economy.

Rebosis Property Fund also released results recently, growing its dividend 7.4%. The company has forecast for growth between 4% and 6% in its next financial year. This may be below inflation which could hit 6%.

Property companies are finding it difficult to forecast dividend growth. There are just too many uncertain factors. They don’t know when cycles will turn so that the economy grows more aggressively and consumers become stronger.

Redefine Properties has nevertheless forecast that it can repeat dividend growth at least close to 7% in 2018, having forecast between 5% and 6%.

Indluplace Properties grew its dividend 5.6% in the year to September 2017. This company owns and rents out residential properties at a level above affordable housing, basic entry level rentals. It has forecast dividend growth of between 4% and 7% in the year to September 2018.

We await to see what other listed property companies reporting this season have achieved in the past six months or year and what they are forecasting for their next respective periods. Investec Property Fund and Investec Australia Property Fund are the next to report.