In South Africa property
fundamentals are tough and
distribution growth is expected
to slow, thus SA-based property
companies like Vukile, Emira, SA
Corporate and Redefine pulled back
harder in the correction.
That said, difficult local conditions
are encouraging investors
to look at companies with
offshore investments.
LOCAL VS
OFFSHORE LISTED
NET PROPERTY
FLOWS YTD
(See: Figure 2 - Stanlib).
“I understand the drive,” says
Duncan. “Companies are battling
to get sustainable earnings growth
from the SA core portfolios. The
SA listed property index one year
forward consensus distribution
growth is about 9%. If you
unpack this, SA centric portfolios
are delivering mid-single digit
distribution growth but what is
driving the average closer to 9% are
those funds with offshore assets
benefitting from stronger offshore
property fundamentals and
rand weakness.”
Yet the Catalyst team is not a big
fan of SA firms going offshore
regardless. “You need an
established platform; you need to
know the market. Real estate is
about understanding fundamentals
and being on the ground. I fear that
Figure 2: Source: Stanlib
“We have seen more increased
offshore appetite from our
investors. Offshore property
offers better opportunities,” says
Ndlovu. “The valuations are more
attractive and the fundamentals
are strong (declining vacancies,
good rental growth, and improving
economic growth (US, UK).” He
adds that offshore property
offers more diversification, not
only across regions but across
sectors not typically found in South
Africa like hospitals, storage, data
centres, hotels, residential, timber
plantations and prisons. Currency
diversification is another factor.
Of course South African companies
have a patchy track record when it
comes to investing offshore, making
local fund managers wary of the
current enthusiasm for
offshore expansion.
32
ISSUE 4 – JULY 2015
in three to five years some of these
companies may find they have
bought a lemon.”
Ndlovu is inclined to agree.
“Most SA property players have
been prudent in their offshore
acquisitions. But they are not the
only ones with a cheque book. They
need to be careful not to overpay
or buy up the portfolios others
are dumping.
Of the offshore plays, New Europe
Property Investments, better
known as Nepi, remains a favourite.
““We think that Nepi has a strong
investment case,” says Kalla. “It has
a large development pipeline with
access to cheap funding, which
should see the fund continue to
deliver double-digit distribution
growth into the medium term. They
have established themselves as the
dominant retail player in Romania.”
Investec Australia with its low
gearing and low cost of capital
is another favourite, as is UK
developer Capital and Counties.
“We are optimistic about
them,” Kalla says. “We like the
fundamentals in the UK, particularly
central London which bodes well
for CapCo.”
Of the mid caps, Vukile and SA
Corporate feature strongly. Their
yields of 8.5% are very attractive
in this environment. Hyprop, with
its portfolio of dominant shopping
centres is a defensive stock that
will continue to show good growth,
despite the fact that it looks a little
expensive on a 5% yield
While most of the fund managers
tend to hold investments through
the cycle, the team at Sesfikile
used the pull back to generate
some alpha. “We were sitting on a
bit more cash than usual because
we had sold out of some stocks,”
says Kalla. “For instance we bought
Pivotal at R17 on listing, sold it at
R25 and bought back in at R22. In
this market you have to be active,
property is a low alpha sector,
so we are using the volatility to
create alpha (returns ahead of
a benchmark).
Whether you choose to trade, or
stay invested through the cycle,
property should be part of a
diversified portfolio, says Robins.
Listed property is for the long-term
and in the short-term – certainly in
a world of volatile global interest
rates – the ride may be bumpy
although the final destination
should be worth it. ■
"
A 20% return
is not the norm.
Past returns
were a result
of all the stars
being aligned,
Paul Duncan,
Catalyst