Listed property sector set to undergo consolidation

Catalyst Fund Managers investment manager Paul Duncan says it is difficult to assess the scope for listed property to grow its proportionate size on the JSE.

South Africa’s listed property sector is set to undergo consolidation in 2014. The sector saw various listings in 2013 and, historically, listings booms are followed by consolidation.

Already at the end of this year there was activity in the market, with listed funds buying smaller listed funds.

Arrowhead bought a 31% stake in Vividend Income Fund in December for R430m. Also in December, Vukile Property Fund announced it had concluded an agreement to buy 34% of Synergy Income Fund in a deal valued at about R338m.

"We will see lots of consolidation activity in 2014 following this year’s listing boom," says Grindrod Asset Management chief investment officer Ian Anderson.

"Larger companies trading at low yields are buying smaller companies at higher yields. It makes sense," he says.

"We have the bigger companies acquiring smaller companies by issuing shares and not having to pay with debt, so we have earnings enhancing transactions."

The new real estate investment trust (Reit) structure for the industry is also expected to spur consolidation.

The Reit structure, which is recognised in most major property markets internationally, became available to the South African property sector early this year. It brought tax and regulatory changes to listed property groups, increasing foreign investment opportunities for South Africa’s property sector. The structure may be extended to unlisted groups in 2014.

"The main reason for the overhaul is that existing local structures, property loan stocks and property unit trusts, are unevenly regulated and subject to different tax treatments, prompting the need for a shared set of regulations," AJ Jansen van Nieuwenhuizen, head of tax at Grant Thornton Johannesburg, wrote in a paper earlier this year.

Growthpoint Properties executive director Estienne de Klerk says listed property is growing even if it does not contribute as much to South Africa’s stock market, the JSE, as listed property contributes to other developed stock markets.

Growthpoint is the listed sector’s biggest counter and is included in the JSE’s top 40 index. It has grown its market capitalisation from only R30m in 2002 to more than R50bn now.

With Growthpoint’s rapid growth, its foreign investor base has grown from 3% in 2009 to close to 20%.

But while South Africa’s listed property sector has developed substantially, the sector’s contribution to the JSE is still well behind more developed markets, where listed property makes up "closer to 10%" of overall stock markets, Mr de Klerk says. He agrees Reit legislation and a number of planned new listings will see continued growth in the sector.

Catalyst Fund Managers investment manager Paul Duncan says it is difficult to assess the scope for listed property to grow its proportionate size on the JSE.

Mr Duncan says there is a large amount of direct real estate owned by institutions and unlisted funds which may list in the near future.

One consolidation that should go ahead next year is the merger of sister property companies Octodec Investments and Premium Properties, which got the go-ahead from linked unitholders at Octodec’s annual general meeting in December.

Another potential merger is that of Acucap Properties and Sycom Property Fund, whose portfolio is managed by Acucap.

Analysts have said the merger makes commercial sense.

The merged entity would have a market capitalisation of about R16.5bn. It would be well behind giants Growthpoint Properties and Redefine Properties but much bigger than other local listed funds.