finweek

A pioneer of the REIT sector

Mike Watters, CEO of Redefine International
Mike Watters, CEO of Redefine International

Mike Watters is, at first glance, the embodiment of a corporate CEO. But there’s a sense of underlying shyness that is at odds with that image. 

He’s not that comfortable talking about himself. Even so, friendships formed in his youth that endure to this day tell you quite a bit about the man who heads up Redefine International. 

There is no reserve when it comes to talking about the property sector and the company that he has grown from £5m into what is today a UK real estate investment trust (REIT) with a market cap of around £700m (about R11bn) and a £1.53bn (about R24.5bn) property portfolio. 

Watters describes himself as fortunate. Perhaps because the fact that he ended up in the REIT sector was not initially of his own making. The irony is that the property and trust sector that Watters found himself in was one that was totally out of favour when he first started working in corporate finance at Standard Merchant Bank. 

“It was a bit of a joke in the late 1980s,” quips Watters. 

But the team at Standard Merchant was very innovative and helped create the loan stock sector, building on the work that had been done by Gavan Ryan who, at the time, was head of UAL Merchant Bank Ltd. 

“Gavan came up with the idea of a variable rate loan stock that paid out all the interest deducted against tax, that way recreating the unit trust without the extreme laws.”

It started the ball rolling for what is today the REIT sector. 

“I was very fortunate. I didn’t realise it was my lucky break because that was the start of the golden age of listed property.” 

Pioneering moves

Watters spent years “having fun listing a whole lot of property companies” before setting out on his own, something he was able to do with the backing of the Coronation Group.

While building Corovest into a large SA business, he met Marc Wainer (executive chairman of Redefine Properties, a local REIT that has a major shareholding in Redefine International). It was not long before the two decided to expand offshore. 

But in the early 2000s companies were not permitted to take money offshore and it took some convincing the Reserve Bank. 

“We had a business plan and they eventually allowed us to externalise £5m in capital. I took that £5m (about R50m in those days) to London,” reflects Watters. 

It was no easy task. Watters was around 40 at the time, had a young family, knew no-one in London and his wife was less than thrilled about the move. Fifteen years on, Redefine International is a FTSE 250 premium listed stock on the London Stock Exchange with a secondary listing on the JSE. 

How different is a UK REIT to an SA REIT?

A UK REIT and an SA REIT are not that dissimilar, says Watters. 

“They are both tax-efficient structures, fairly similar from a structure point of view but different in what investors are looking for. Investors in the UK are more inclined to look at total return (NAV [net asset value] growth and distributions) and are loathe to pay premiums to NAV. South African REIT investors only look at income and growth and are quite happy to pay a premium to the underlying net asset value.” 

But given the global REIT capital flowing around the world now, it’s merging, he says.

“There is a convergence of REITs around the world coming to resemble each other to meet the boxes that need to be ticked for global investors. 

“There are major REIT investors that pretty much set the rules of what they need to invest in a REIT. So you need scale, liquidity, good corporate governance and the right debt levels. If you meet those requirements, they will invest in you.” 

Post-Brexit perceptions

Asked whether stock markets are less bullish about REITs following Brexit and Trump, Watters says perception in the short term has changed not only around REITs but also around all stock market investments. 

Everyone, asserts Watters, is concerned about Brexit. But for him the issue is less about the underlying business than it is about dealing with what people worry about. 

“It is going to be five years or even longer before Brexit pans out. We are going to have to get used to it.” And the effects of Brexit, he says, will be as great on the EU as it will be on the UK. 

But the fundamental reason for the existence of REITs – to produce income – is there and will be there forever, he maintains. 

“People need income and that is why REITs are so highly rated. If you have an investment that gives you solid, stable and growing income, that will be what people want to invest in. REITs, I believe, will just get stronger, no matter all these fundamental issues around the world.” 

Watters says he meets “all sorts of people, all with different skills sets” in the REIT sector. “It’s certainly not a mundane industry.” 

What he likes least about it is that it is a long lead-time business. 

“It’s not like placing your bets, the wheel spins and you find out if you have won or lost straight away. It takes a long time before you see the fruits of your labour, whether positive or negative.” 

That Watters misses South Africa is a given. The weather in the UK gets to him; the commuting is tough – three hours on the train each day just to live in the country “because it’s more like a South African house with a garden”, and the incessant bundling up and shedding of clothing in winter drives him barmy. 

But London, says Watters, is the “centre of the world. It’s stimulating. You are dealing with, and surrounded by, some of the smartest people in the world.” 

This is a shortened version of an article that originally appeared in the 2 March edition of finweek. Buy and download the magazine here.

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