SA’s REIT market still too unusual for many Investors

A number of experts at the SA Reit conference said they were finding it difficult to get investors who had not bought Reit assets before to consider them.

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South African property funds have recognised a tremendous need to educate investors about how they function as investments, SA Commercial Prop News has learnt.

This was revealed at the SA Reit conference which took place in Sandton last week  — aimed to take stock on how far the listed property sector has come since the funds undertook Real Estate Investment Trust (Reit) status.

Reits are property funds that follow the same tax dispensation and various business practices. One of their key facets is that they pay a minimum of 75% of their distributable earnings out each year to their unitholders.

They also offer capital growth and since their distributions are secure they believe they should be seen as alternative investments to some risky equities. Many countries’ property funds have become Reits in order to promote themselves as one asset class which investors from around the world can understand.
 
Reits, comply with certain tax dispensation and also with governance standards.
 
However, a number of experts at the conference said they were finding it difficult to get investors who had not bought Reit assets before to consider them.
 
“For a start, it seems investors, especially retail ones want to touch the property. So we take the fund managers on tours and so on. Nevertheless, this is a young industry in SA and I think of number of people in finance do not yet see listed property as its own asset class. Bond investors may say it is too much like equity and equity investors may say it is too much like bonds,” Keith Engel, partner at EY’s Tax Practice said at the conference.
 
Year to date, SA’s listed property sector as represented by the SA Property Index (SAPY) has made a total return of 14.5%. Meanwhile the FTSE/JSE All Share Index has managed 7.1%.
 
The listed property sector accounts for only some 3.5% of the JSE. However, the sector, especially its two biggest players, Growthpoint Properties and Redefine properties are looking to grow by expanding their shareholder bases to include more foreign investors and institutions.
 
Attaining Reit status would assist in this regard.
 
“The big funds have to look abroad to foreign investors. There are only so many other funds they can take over here and so many assets they can buy here in SA. Also, their rivals won’t just give up any assets to them. So it makes sense that they must promote themselves abroad,” Evan Robins, property portfolio manager at the Old Mutual Investment Group said.

“Of course we want to grow our presence abroad and we are always looking for good opportunities, hence our investment in Growthpoint Australia for example,” Estienne de Klerk executive director at Growthpoint properties said. 
 
Various foreign property fund managers attended the conference as panellists and speakers.
 
One was Andrew Parsons of Resolution Capital Australia. Parsons runs a fund which invests in some 40 Reits from around the world.
 
He said he was currently focussed on Reits that had exposure to fast growing cities like London and Berlin.
 
“I like cities which have the right zoning rules in place and pace their building properly. London is such a city. Everyone wants to live in London. Where else would you be, but the building is being conducted carefully in that city. We have many Reits listing as residential specialists, which is exciting. The zoning and pace controls help; rents can rise because you do not have over supply. Otherwise we would have problems like those in China where too much is built too quickly,” Mr Parsons said.
 
Fraser Hughes, deputy CEO of European Public Real Estate Association (EPRA) said while SA’s Reit market was new, investment institutions had been watching SA property for years.
 
“I know people who invest in property who come from all over Europe and have been visiting SA for decades. The SA Reit Market is actually quite sizeable compared with other markets. It is bigger than Netherlands’ and Germany’s. So, I think it is just a matter of time before we see more large funds from outside of SA buying into South African Reits,” he said.
 
SA’s listed property funds have grown steadily over the past decade or so from being worth about R30bn ten years back to nearly R330bn in terms of market capitalisation now,” he said.
 
Mr Hughes said he expected to see more specialised funds listing in SA.
 
“There is a global push for specialised Reits, especially residential Reits. I am not too familiar with how much residential property is listed in SA but I think it will be a big opportunity for funds here. This is as a city like Johannesburg’s population grows. I am aware that many African professionals are moving to Johannesburg and many may want to plant themselves in the city,” he said.

David Shapiro, stockbroker at Sasfin Securities said listed property was a strong alternative to bonds and cash.

“Right now, many of my portfolios have a good 10% or 15% of listed property. Many folks have underestimated the capital growth of listed property. I think fund managers must just promote property simply and more funds will buy into it,’ he said.

The conference was sponsored by Nedbank Corporate Property Finance.