International Hotel Group, Capital & Regional two tickets to UK

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Investors looking for exposure to UK real estate have two more options to choose from after the listing of Redefine International spin-off International Hotel Group and mall owner Capital & Regional.

The two counters bring completely different offerings tothe market, in terms of the type of assets they own and their initial size.

IHG owns and develops hotels, mostly midmarket two- and three-star properties, while Capital & Regional invests in medium-sized malls in secondary towns. AltX-listed IHG has its primary listing on the Luxembourg Stock Exchange (since July) and currently has only three hotels in its portfolio. At last week’s listing price of R20,55, IHG had a market cap of R308m.

Capital & Regional, on the other hand, has been listed on the London Stock Exchange for nearly 30 years and owns a £1bn portfolio comprising eight community shopping centres. The company has a market cap in London of around £469,5m.

But both new listings are income plays, so they will appeal to investors looking for a sterling-based dividend stream.

IHG is headed by SA industry veteran Helder Pereira, former MD of Southern Sun Hotels, who moved to the UK in 2008 to launch a hotel management company now known as Redefine BDL Hotels. This company, which together with SA-based Tsogo Sun is a shareholder in IHG, today manages 70 hotels across the UK.

IHG is targeting a dividend yield of around 7%, which is attractive compared to the 4% or so available from most of the JSE’s other offshore counters.

Pereira aims to grow assets from the current £18,3m to £200m within three years. “Aggressive but doable,” he says. Though the company currently doesn’t own any London hotels, Pereira says the long-term plan is to become a major player in key UK cities including London, Glasgow and Edinburgh.

He concedes that South Africans may be nervous about investing in hotel-focused property funds, given the concern around the split unit structure of SA-based Hospitality Property Fund and the recent weakness in the SA hotel and tourism market. But he says IHG brings a very different offering to the market. “Not only is our structure a lot simpler, with a single class of shares, we are also focused on the economy and middle tier of the UK hotel market, which is more resilient and less exposed to cyclical swings than the upper end.”

Pereira says the UK hotel sector has been a good bet for real estate investors over the past five to seven years, outperforming offices and retail on the back of a steady recovery in hotel occupancies and revenues.

The listing of IHG and Capital & Regional brings the number of new property offerings on the JSE to six for the year to date. Two more property counters are expected to list before year-end: self-storage fund Stor-Age and Tsogo Sun possibly reverse listing its property assets into Hospitality Property Fund

Though the rush of new property listings brings more choice for investors, fund managers are becoming increasingly cautious about which new offerings they will support.

There is a growing view that while rand hedge stocks remain very much in vogue, they are becoming expensive.

As Ian Anderson, chief investment officer at Grindrod Asset Management, puts it: “IHG and Capital & Regional are listing to take advantage of SA investors’ insatiable appetite for offshore property and their willingness to pay a premium to net asset value to gain access to that exposure.”

Meago Asset Managers director Anas Madhi says investors who want to diversify offshore should take cognisance of the varying character and quality of new listings and ensure they come with a commensurate risk/reward profile.

Referring to Capital & Regional, Madhi says though the company offers an additional entry point into the UK retail market — similar to that provided by Intu Properties, Capital & Counties Properties and AltXlisted New Frontier Properties — he sees limited short-term upside as the London share price has already run hard. For the year to date, Capital & Regional has delivered a total return of 31%, placing the counter on a forward dividend yield of 4,5%.

Madhi notes that several of Capital & Regional’s shopping centres are located in secondary UK nodes such as Ipswich, Blackburn and Luton that do not attract the same support as retail assets that are located in prime London areas. The company’s shares are also tightly held.

“We belive tradability of Capital & Regional’s shares on the JSE is likely to remain low initially.”


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