SA’s listed property market Comes of Age

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Consolidation has been a large theme of this year in the listed property sector with a few more mergers and acquisitions still to take place, says Ortneil Kutama, SA Commercial Property News Media Director. Consolidation has been a large theme of this year in the listed property sector with a few more mergers and acquisitions still to take place, says Ortneil Kutama, SA Commercial Property News Media Director.

South Africa’s listed property sector made strides in becoming an accepted and even popular asset class in 2014, SA Commercial Prop News has learned.

Consolidation has led to more liquid, attractive stocks. We have also seen the beginnings of specialisation in the sector, reports Ortneil Kutama, SA Commercial Property News Media Director.

The listed property sector is currently worth about R511 billion when one includes counters such as Capital & Counties Properties, Intu Properties, Investec Australia Property Fund, Redefine International, New Europe Property Investments (Nepi) and Rockcastle Global Real Estate which are all listed in SA, but have assets offshore. If these are excluded, it is worth about R358 billion.

There have been about seven property listings this year, when you include the recent additions of property developer Acsion Limited, Germany based Sirius Real Estate Limited and Sandton office owner, Pivotal Fund.

This means a third of all the company listings this year have been in real estate. The sector has also proven a strong investment in 2014, beating the JSE by some distance.

Listed property outperforms

In the twelve months to October, the South African property index or SAPY crowned a total return of 19.4%. SA’s equities were less impressive over this period only 12.5%.

A number of analysts feel South African listed property won’t repeat its heroics in 2015. The support of bonds will not be as strong.

Grindrod Asset Management’s chief investment officer, Ian Anderson says property investors can expect less from their investments in terms of distributions next year. “It was 12% this year but will slow to between 8% and 9% next year,” he says.

Anderson says the rand won’t be as weak against the dollar and euro. As such the offshore property counters won’t have their returns magnified to as great an extent. Bond yields are expected to rise next year.

One headwind is the effect of bond yields rising. These would place downward pressure on property stock prices, according to Mike van der Westhuizen, an investment analyst at Citadel Wealth Management.

"Positive distribution growth should lead to further price growth, but rising bond yields and closing of the property spread — the difference between bond and property yields which is currently negative, could have a significant negative impact on prices," Mr van der Westhuizen said recently.

Consolidation and Mergers on the cards

Consolidation has also been a large theme of this year. A few more mergers and acquisitions may still take place.

Key deals included Acucap Properties’ purchase of an increased stake in Sycom Property Fund and Redefine Properties’ acquisition of Annuity Property Fund. Arrowhead also acquired Vividend, but Growthpoint’s acquisition of a 34.9% stake in Acucap and a 31.5% stake in Sycom represented the single largest transaction just over R4.656bn to take place this year.

Growthpoint also acquired the Tiber portfolio from private property group Tiber, which was announced in 2013 but concluded early this year. In total, GRT issued just under R10bn of new equity in 2014 making them the most acquisitive company by value. Its rival, Redefine issued just under R6bn of new equity capital in 2014.

The biggest deal of the year is actually one that isn’t quite finished yet. Growthpoint Properties which is SA’ largest listed property fund is in the process of taking over Acucap Properties at is looks to enhance its current retail portfolio.

The deal will make Growthpoint nearly twice as big as its rival, Redefine Properties, by market capitalisation. The two funds already dominate the listed sector and are beginning to get attention from investors abroad.

Deals that Fell Away

A number of mergers fell away this year, such as Vukile Property Fund’s proposed takeover of Synergy Income Fund. Vukile, like many other funds sees the appeal in shopping malls, and Synergy has some very appealing ones which are located in rural areas and townships.

Redefine also emerged as the victor in the long-running takeover battle with Growthpoint for Fountainhead Property Trust assets, but had fallen short of taking home the prize.

Earlier this year, Black-managed stocks Rebosis Property Fund, Ascension Properties and Delta Property Fund proposed triple merger, which was also called off and it cost the funds involved. The leaders of the funds cited bad timing. It may have been a case of managing egos. The merged Broad-Based Black Economic Empowerment powerhouse could have only had one CEO.

Specialised Property Funds

Analysts also expect to see the listing of specialised funds in 2015.

A storage based one is on its way and there is also a strong possibility of residential focussed funds listing. We may even see a hospital based fund list eventually and other warehouse distribution funds which would benefit from online shopping. They would hold the stock which was delivered to the online shopper’s house.

According Ken Reynolds, regional executive at Nedbank Corporate Property Finance, while there are some exceptions, South Africa tends to have more generalist property REITs that invest in a mix of segments such as commercial, industrial, office and retail. “One of the trends we have seen internationally is for more focused REITs that invest solely in just one segment of the property market."

Reynolds adds: “While many international REITs are weighted in favour of a specific sector, this trend hasn’t emerged in South Africa yet. Over time we could expect to see more focused REITs locally and in fact it is likely that a REIT focused purely on the residential sector will list at some point over the next 12 months. This would be completely new to our market and could be the catalyst towards more sector-specific REITs.

Many property groups believe that residential property will be a buzz industry next year. Arrowhead Properties announced in November that it had acquired residential properties valued at just more than R1bn. It wanted to lead the chase for residential assets.

Vukile Property Fund’s CEO, Laurence Rapp, said also in November that he was looking to convert offices the company owned in Randburg into residential properties.

Analysts believe there is now adequate stock available for residential investing. There is also a strong demand for student housing with Redefine recently buying a company focussed on student accommodation.

“Residential property will be hugely popular next year. It will be like what retail properties have been. There is a tremendous level of demand for housing in SA. Not one company can serve the need alone but Arrowhead Properties wants to be heavily involved,” chief operating officer at Arrowhead Mark Kaplan says.

Conclusion

Nevertheless SA’s sector is still relatively small compared with the rest of the stocks listed on the JSE. It is also somewhat smaller than listed property industries abroad. However, it is young and gaining traction.

Rapp, who is also Chairman of the SA Reit Association, says the sector needs to get more scale in order to become much more attractive to institutional investors in SA and abroad.

Read more on:

SA Property Market  |  Listed Property / REITs  |  Nedbank CIB Property Finance  |  Growthpoint Properties  |  Redefine Properties  |  Arrowhead Properties  |  Synergy Income Fund  |  Acucap Properties  |  Rebosis Property Fund  |  Annuity Properties  |  Vukile Property Fund  |  Ascension Properties Limited  |  Laurence Rapp  |  Real Estate Investment Trusts (REITs)  |  Fountainhead Property Trust  |  Redefine International  |  Ken Reynolds  |  Delta Property Fund  |  Sycom Property Fund  |  Ian Anderson  |  New Europe Property Investments (NEPI)  |  Intu Properties  |  Nepi Rockcastle  |  Capital and Counties Properties (Capco)  |  Investec Australia Property Fund  |  Pivotal Fund Ltd  |  Tiber Group  |  Sirius Real Estate  |  Ortneil Kutama  |  Acsion Limited