Rand hedge property stocks retain their worth

The stellar performance of offshore real estate portfolios compares to a dismal -0‚31% recorded by the South African Listed Property Index (SAPY) for the 12 months to February.

Rand hedge stocks such as Capital & Counties Properties, Redefine International, MAS Real Estate, New Europe Property Investments and Intu Properties remain attractively valued compared to pure domestic businesses.

If you wanted to cash in on the post-crises recovery in global real estate markets five years ago‚ without having to take money physically offshore‚ your JSE options would have been limited to UK mall owner Liberty International (now split into central London arm Capital & Counties Properties and retail-focused Intu Properties).

Today‚ JSE property punters have seven individual offshore stocks to choose from and more to come.

These rand hedge property counters‚ which receive 100% of their earnings in either US dollars‚ British pounds‚ euro or Australian dollars‚ were some of the JSE’s biggest money-spinners over the past year‚ no doubt on the back of a weaker rand and an ongoing search for hard currency income streams.

Capital & Counties Properties (Capco‚ CCO)‚ owner of London’s trendy eat‚ shop and play precinct Covent Garden‚ leads the pack with a phenomenal 90% total return for the year to February.

That was followed by Redefine International (RDF)‚ which owns an R18bn portfolio of offices and shopping centres in the UK‚ Germany‚ Switzerland and Australia‚ with an equally impressive 78% total return‚ data from Catalyst Fund Managers show.

AltX-listed MAS Real Estate‚ the Attacq-backed Western European play‚ is up 68% over the past 12 months‚ while the Resilient group’s Romanian-focused New Europe Property Investments (Nepi) returned 41%.

The UK’s Intu was up 35% while new kid on the block‚ Investec Australia Property Fund‚ delivered a 30% total return since its listing in October last year.

Rockcastle Global Real Estate Company (ROC)‚ also in the Resilient stable‚ achieved 29% for the 12 months to February.

The stellar performance of offshore real estate portfolios compares to a dismal -0‚31% recorded by the South African Listed Property Index (SAPY) over the same time.

There’s also been a growing trend to diversify local portfolios beyond South Africa.

In fact‚ at least 10% of total assets of sector heavyweights Growthpoint Properties‚ Redefine Properties and Resilient Property Income Fund are already exposed to developed markets.

Others‚ like Attacq and Hyprop Investments‚ are now playing in the African space.

The key question is whether investors are likely to continue making more money offshore than in their own back yards?

And‚ if so‚ which individual rand hedge counters potentially offer the best returns over the next 12-18 months?

Analysts agree that while investors shouldn’t expect a repeat performance of the super-returns seen over the past 12 months‚ it’s not too late to buy offshore property stocks.

Catalyst Fund Managers’ Paul Duncan says companies in the global listed real estate universe have reported “impressive” results on the whole for the period ending December 2013‚ with good evidence of positive property fundamentals.

He says the commercial real estate markets of London and San Francisco are particularly buoyant‚ with momentum gaining in Manhattan‚ Boston‚ Hong Kong and Singapore.

“We are also starting to see increased appetite for good quality properties in Italy and Spain.”

Stanlib head of listed property Keillen Ndlovu echoes a similar sentiment. He says though it’s important for investors to have a mix of both local and offshore property stocks in their portfolios‚ offshore property stocks are currently looking more compelling than South African property stocks on three measures: yield‚ income growth and net asset value (NAV).

Ndlovu notes that offshore counters are trading at a forward yield of 4%‚ which is higher than global bond yields at about 3%. In contrast‚ local counters are trading at a forward yield of about 8%‚ which is lower than local bond yields at 8.6%.

Also‚ global listed property is still trading at a discount to NAV (average 6%-7%) versus a premium of 8%-10% for local property stocks.

“We expect NAV to grow faster in offshore markets given the higher potential for rental growth and limited amount of new developments compared to that in South Africa‚” he says.

He concedes that South African property stocks still offer attractive income growth of 8% on average. “But global earnings growth is not far behind at 6%-7% in hard currency and may surprise on the upside.”

Maurice Shapiro‚ fund manager at Alternative Real Estate Capital Management‚ believes that South African investors have yet to increase their weighting to offshore property adequately.

He agrees with Ndlovu that developed markets now offer more value than emerging ones.

“South Africa being among the weakest of emerging markets means that even good local listed property companies will find it difficult to navigate a rising interest rate environment amid the weak GDP growth outlook.”

However‚ Shapiro says the tapering of quantitative easing is still a key theme affecting global markets.

And it is difficult to fully appreciate what impact the removal of “easy money” will have on international property companies‚ let alone South African property companies over the coming 12-18 months.

As such‚ Shapiro cautions investors to be very selective about the companies they choose to invest in.

Deciding which offshore stocks to buy now will‚ of course‚ depend on your individual risk profile — most analysts advise a five-year investment horizon — whether you are more interested in income or capital growth and your current geographic and currency spread.

Stanlib’s Ndlovu singles out MAS (MSP) as his 2014 top pick among the JSE’s offshore counters.

The company‚ which plans to move to the JSE’s main board later this year‚ recently completed a heavily oversubscribed capital raising of a substantial R2.74bn‚ which will significantly boost liquidity and increase net asset value almost threefold.

Says Ndlovu: “MAS has great hands-on management and well-located assets in Switzerland‚ Germany and UK with potential for a nice re-valuation uplift‚ as most assets and developments are valued at cost.”

Once MAS moves to the main board‚ it will likely be included in the SA Listed Property Index‚ the benchmark for most property fund managers‚ which Ndlovu maintains should lure more investors to MAS.

While MAS is still mainly a capital growth play‚ Ndlovu welcomes the company’s intention to become an income payer by the end of 2016.

Shapiro also favours MAS as well as Capco.

“We like both these counters as they are primarily capital growth plays and pay very low income distributions‚ which mean they should be less susceptible to interest rate hikes.

Also‚ both MAS and Capco have a significant development pipeline in the UK and both management teams have engaged with local government in order to extract value from their assets.”

Shapiro says though Capco has already run hard over the past three years the stock is not yet fully priced‚ as plans to turn Earls Court into an entirely new district of about 8 000 apartments and two high street shopping nodes should unlock further upside.

“The first residential phase at Earl Court is expected to be launched within the next few months‚ which should provide another catalyst for share price growth. In addition‚ Capco management continues to actively enhance value at its Covent Garden estate‚ which has become an iconic tourist attraction and an important hub for exclusive London retailers.”

Macquarie Research property analyst Leon Allison’s top offshore pick is Romanian-focused Nepi.

Like Capco‚ Nepi may appear expensive with its share price up nearly threefold over the past three years. Its market cap has surged from less than R5bn to R16.9bn over the same time.

However‚ Allison says the sizable premium to NAV at which Nepi is trading is justified given the company’s accretive investment pipeline and growth prospects.

Allison expects Nepi to own around one-third of all the malls in Romania larger than 40‚000m² in two years’ time.

The stock offers an initial 5% yield (in euro)‚ with dividends expected to continue to grow at double-digit rates — Nepi has delivered dividend growth of an average 12.7% a year over the past six years.

“Nepi remains attractive as a hard currency investment offering both an above average yield and growth.

"We view its risk as lower than a normal operating company due to contractual income streams from long leases with large international tenants.”

Investors who want access to the burgeoning African consumer markets north of South Africa’s borders should consider Rockcastle‚ which has seen its market cap surge from less than R1bn when it listed in July 2012 to R7.5bn currently.

The counter is trading at a forward yield of around 5.5%.

Though invested primarily in global listed Reits‚ Rockcastle last year acquired stakes in two shopping centres currently under construction in Zambia: the 12‚500m² Kafubu Mall in Ndola and the 29‚000m² Mukuba Mall in Kitwe.

“Rockcastle is well placed to enter Africa as it has a substantial kitty‚ having easily raised R1.2bn in an oversubscribed private placement last year‚” says Meago Asset Management director Jay Padayatchi.

JSE investors may soon have another rand hedge opportunity to choose from.

German property play Sirius Real Estate‚ currently listed on London’s AIM‚ is considering a dual-listing on the JSE later this year as the next step in the company’s growth track.

Sirius owns a portfolio of office and industrial properties in Germany worth €428m. South Africans already hold more than 40% of the company’s shares‚ with the Attacq-backed Luxembourg-listed Karoo fund owning 30% of the stock.