SA listed property looks offshore

Given the poor performance of local listed property stocks last year, South African investors have been offered opportunities to look for offshore investments.

The South African listed property sector is unlikely to maintain returns seen in 2012 of more than 30%, as the office market remains subdued.

Property stocks delivered a disappointing 8,39% average total return in 2013, way behind the Alsi's 21,43%, but investors who bet on the JSE's offshore real estate counters were in the pound seats.

Redefine International, whose £1bn (R17,7bn) portfolio spans the UK, Germany and Australia, was the sector's top performer with a return of 118%.

London-focused Capital & Counties Properties and Romanian retail play New Europe Property Investments (Nepi) delivered an equally impressive 69% and 56,5% respectively. Despite muted overall returns, 2013 was an eventful year for listed property in terms of capital raisings, acquisitions and new listings. According to Stanlib, the sector raised a massive R18bn (R11bn in 2012) in new equity last year.

The bad news is that analysts expect another humdrum year for capital growth, with total return forecasts ranging from only 7% to 12% for 2014. Meago Asset Managers director Jay Padayatchi says property share prices will remain vulnerable to uncertainty around the pace of tapering by the US Federal Reserve and global bond yield movements.

Keillen Ndlovu, head of listed property funds at Stanlib, cites rising operating costs, the introduction of e-tolls and a slowdown in retail spending amid an increase in shopping centre supply as other factors that could erode the earnings of property companies this year. However, analysts agree that the sector continues to offer pockets of value, with a number of counters likely to deliver double-digit returns in 2014. Padayatchi believes continued tapering into 2014 creates a high risk of currency volatility and hence the need to hold on to rand-hedge stocks.

He says though offshore funds outperformed significantly in 2013, they are not necessarily all fully priced. "Nepi still appears attractive on the back of an exceptional yield-enhancing development pipeline in hard currency (euro) and double-digit distribution growth expectations. "The landscape in which Nepi operates appears to be far from saturated as its developments continue to attract prime European retailers desperately in search of growth outside Western Europe."

Among the larger local stocks, Padayatchi favours Redefine Properties, which is undergoing a transformation. "Redefine has several premium-grade office developments in high-demand nodes under way, and there is a strong likelihood of acquiring the balance of the shares in Fountainhead Property Trust that it doesn't already own, which will improve its retail offering substantially."

Padayatchi also refers to Redefine improving its offshore holdings, which, together with a clean-up of the tail of smaller, poorer-quality properties, could result in a rerating of Redefine. Some of the smaller stocks that underperformed in 2013 are likely to become potential takeover targets for larger players unable to find suitable yield-enhancing direct property acquisitions, says Padayatchi. He believes Dipula Income Fund, which is trading at an attractive forward yield of more than 9%, is a case in point. Ndlovu's picks for 2014 are newly listed Fourways Mall owner Accelerate Property Fund, government-tenant-focused Delta Property Fund, retail-focused Hyprop Investments and Resilient Property Income Fund.

"Accelerate is trading in line with net asset value compared with the sector's premium of about 20%. And it offers value at a forward yield of about 9% compared to the sector's 7,5%." Ndlovu says Delta also looks cheap on a forward yield of 9,5%. "The fund has a longer lease expiry profile than the sector and government makes up almost 70% of its revenue, which creates low default risk." Though blue chips Hyprop and Resilient both trade at forward yields below 6,5%, Ndlovu believes the premium is justified, given the quality of both funds' retail assets, track record and management expertise.

"We also like Hyprop's strategy of venturing into the rest of the African continent through its tie-up with Atterbury." Ndlovu says Resilient never fails to disappoint in terms of distribution growth, which is likely to be double that of the sector average this year. It also offers foreign exposure through its interests in stablemate Nepi, focused on Romania. Ian Anderson, chief investment officer at Grindrod Asset Management, singles out Nepi as his top pick for 2014. "The stock should continue to deliver distribution growth of about 15%/year in euros over the next 2-3 years as it takes advantage of opportunities in Romania and expands its footprint to other Eastern European countries."

Anderson says the yields that Nepi is able to secure on development projects exceed the company's average cost of capital by a hefty margin. "These projects will continue to deliver significant shareholder value in the years ahead," he says. The rand is expected to remain weak throughout 2014, which Anderson says should further boost income payouts and the share price.

He likes Arrowhead Properties and Tower Property Fund among the SA-focused counters. "Arrowhead's management team is developing a track record of concluding yield-enhancing acquisitions that should support sector-beating distribution growth over the next 2-3 years and create increased size and liquidity, which should make it more attractive to larger, institutional investors." The company's recent foray into residential property offers investors an opportunity to diversify away from the retail, office and industrial sectors, which currently dominate the SA listed property landscape.

In addition, Anderson notes that Arrowhead is trading at a forward yield of close to 10%, almost 3% above the sector average despite an above-average income growth outlook. Small-cap Tower, whose flagship properties are the Cape Quarter Square and Cape Quarter Piazza in Cape Town, could also rerate this year on the back of corporate action. Tower's share price has fallen 6% since the fund listed in mid-2013, pushing its forward yield in excess of 10%, which Anderson believes makes it a prime takeover target for some of the larger counters.

 

Article by: www.sacommercialpropnews.co.za/

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