SA Property Sector survives 2016 rollercoaster
Towards the end of 2015, the naysayers and the sorry folk who have avoided listed property investing in the past said the sector would struggle in 2016.
While it didn’t exactly shine, it beat other equities and remains a tenacious sector.
"Aside from the political drama here and abroad, including Thuli Madonsela's State Capture report, Pravin Gordhan-SARS wars, Brexit and lastly Donald Trump, investment returns did not disappoint," said Ortneil Kutama, SA Commercial Prop News Media Director.
From January to December 13, equities achieved a return of 3% and were completely battered by property which managed 8.4%. Cash only mustered 7% but bonds reigned supreme with a 14.8% total return.
The property sector was hurt by political uncertainty and slow economic growth. The economy has barely grown this year.
Recent financial results from Reits show that new shopping malls continue to take the shine from old and existing ones while retail sales continue to falter on the back of low consumer spending and confidence.
The industrial sector continues to be resilient with landlords achieving above-inflation rental growth and tenant retention on warehouse and logistics properties while the office sector is the laggard with rising vacancies on properties and the oversupply of rental space.
Property Deals that survived
Many of the larger listed South African funds have made large investments abroad. The likes of Redefine Properties and Growthpoint Properties have entered Eastern Europe for the first time.
Growthpoint took ages to make an investment in Europe. The largest South African based property company eventually joined forces with Globalworth Real Estate, which is a Romanian officer owner. Many analysts are likely to think this pales in comparison to what Redefine Properties achieved by partnering with top Polish investor, Echo Investment.
Redefine surprised many when in March it announced it was involved in a deal to be exposed to 1.2bn euro worth of shopping centres and offices in Poland. This country is the biggest market in eastern Europe with a population of about 38-million people and gross domestic product that has been averaging 3.5% a year for five years.
Its partner, Echo Investments, is one of the best property managers in Poland.
Subsequently, a separate group called Echo Polska Properties (EPP) was listed on the JSE with the Polish assets. Redefine retains a large stake in the company. Redefine is now exposed to 18 properties in Poland.
Growthpoint has spent about R2.7bn to buy a stake in Globalworth. This is small for a company worth more than R80bn but Growthpoint’s approach is to be conservative. The idea is that Growthpoint will inject capital into the Romania based group but could then invest in more East European countries and not just Romania.
Domestically there have been some interesting deals. Tsogo Sun finally got its hands on Hospitality Property Fund. The company can now injects assets into Hospitality and create a super Real Estate Investment Trust. The new Hospitality is the only hotel focussed fund on the JSE. Vincent Joyner, the turnaround CEO, however did not keep his job.
When Hospitality Property Fund was finally taken over by Tsogo Sun, the hotel and casino group, Tsogo then injected hotels into Hospitality. The fund now represents a large and diverse number of hotels in SA and can be seen as a representation of the sector.
Tsogo injected 10 hotels valued at close to R1.8bn into Hospitality.
Tsogo gained more than 50% of the shares in Hospitality. This left Hospitality with ownership of 25 hotels, and about R7.1bn worth of assets.
Redefine was also busy domestically. The company managed to buy The Pivotal Fund. This was an interesting deal given that Pivotal had not been listed for very long and had just begun to grow.
The deal gives Redefine a new portfolio of about R12bn in assets. A key property in the portfolio is the Alice Lane office. Redefine really has stood out this year among the large South African Reits.
Owners of Fortress Income Fund shares have also had an enjoyable 2016.
The company which invests in commuter shopping centres took over Capital Property Fund in 2015, has achieved strong capital and distribution income. By acquiring Capital Property Fund, Fortress gained exposure to logistics assets and distribution centres.
Rand Merchant Bank Holdings (RMH) also ventured into property this year. The company invested in Atterbury, the developer’s new fund.
Atterbury launched a new unlisted growth fund that would be the investment vehicle for the development company’s assets in SA, Namibia and Mauritius.
Called Atterbury Property Fund, it is has assets worth more than R3bn, meaning it would compete with other small property funds.
Atterbury Property Holdings, in which Rand Merchant Bank Holdings recently announced it would acquired a 25.01% stake, owns 80% of the shares in Atterbury Property Fund.
The group announced that Atterbury Property Holdings’ staff would own the remaining 20% stake, which aligns the interests of the company and its staff.
Mara Delta, the pan African real estate investor, made various investments during the year. It obtained exposure to three hotels with triple net euro denominated leases in a deal with New Mauritius Hotels. This meant Mara was about 25% exposed to Mauritius, a popular tourism destination.
One can expect that more private groups will enter real estate or listed real estate in SA, in the near future. Many large corporations own properties which they could list. Alternatively, they could sell some of their assets to seasoned operators of real estate and then lease them back.
Property Deals that failed
One deal which didn’t happen was the takeover of Emira Property Fund. The company has good assets but has been underperforming. A number of property funds have been interested in taking it over. One such company is Arrowhead Properties. The company has a history of growing through acquisitions.
Arrowhead expressed an interest in acquiring Emira’s shares but Emira said the share swop price offered was far too low. Arrowhead may make plays for other companies next year.
Emira has warned it will report negative distribution growth next year. The warning pleased the market but the extent of how poor the distributions will be is unknown.
Is there light at the end of the tunnel?
2017 is set to be a difficult year for South Africa’s economy and in turn listed property. However there will be opportunities for investors. The country managed to stave off ratings downgrades from the three major agencies which apply but it probably has a year to make improvements to the economy or it will be downgraded.
Offshore property funds listed on the JSE or South African funds with offshore exposure could still do well as long as the economies wherein they operate manage to perform.
Listed property is a challenging asset to invest in like many others are but there are still rays of light ahead in 2017 and 2018.
One just needs to look for companies with good management teams, clear strategies and partners when trying to venture abroad or into operationally intensive property subsectors such as student accommodation.
A good investor will remember that investing real estate is a long term game, concludes Kutama.