Property: Local challenges force offshore card

The property sector in South Africa is not a trifling one. Now worth over R6tr – up from R4.9tr in 2012 – it contributes R181bn to GDP and R43bn to the fiscus, says Portia Tau-Sekati, consultant CEO of The Property Sector Charter Council.

Its contribution to other sectors, especially the financial and insurance sector is also significant.

An integral part of the property industry is South Africa’s well-established and sophisticated real estate investment trust (REIT) sector boasting a market cap of around R330bn.

A key contributor to the economy and to investors for inflation-beating growth, it is also an affordable means of property ownership when direct ownership is out of reach.

A star performer for some years now, listed property attracts big lenders. Nedbank Corporate and Investment Banking’s R40bn into listed property represents around 35% of its lending book, perhaps not that startling given that from a credit perspective, listed property is viewed as low risk.

The banks’ confidence in the sector appears well founded, as the listed REIT sector last year managed to outperform all other listed sectors to provide a return of nearly 8% for investors.

The move to offshore exposure

Listed property funds have traditionally held the bulk of their portfolios in local property. A decade ago the sector had no offshore exposure. But economic and political concern is changing that and the country’s REITs have of late been playing more in offshore waters.

Now 35% of earnings come from offshore properties, says SA REIT Association chairman and Vukile Property Fund CEO Laurence Rapp.

Sector top dog Growthpoint Properties has a 65% share in Australian-listed Growthpoint Australia (GOZ) while Redefine’s offshore assets will increase to 25% following a €362m footprint into Poland.

Vukile Property Fund last year made its offshore debut with a R350m investment in UK-focused Atlantic Leaf Properties, giving the fund an international exposure of 4%.

It is not only the REITs growing their offshore books. JSE-listed capital growth property fund and developer Attacq Limited has reduced its local exposure from 64% to 51% in the last year and grown its offshore exposure in developed markets from 12% to 17% through its shareholding in MAS Real Estate and Cyprus, with a further 7% invested in emerging markets in Africa and Serbia.

The Central and Eastern European region has attracted much focus from local REITs mainly due to its high yield offering and low cost of funding – an attractive proposition considering local conditions where the opposite is true.

But exposure to emerging markets and overcooking diversification here can prove to be a rotten road and bring about what Andrew Parsons, MD and senior portfolio manager of Resolution Capital, terms “diworsification”.

Frontier markets like Africa often offer more attractive prospects than home, but some who have ventured into this space have pulled back, worn down by law and currency changes and leasing challenges.

“At least here we know what we are playing with,” says Pat Flanagan, co-founder and chairman of Flanagan & Gerard Property – Development & Investment.

“The local property market is more stable than it was in 2007 but continued liquidity (access to capital to support investments) is fundamental to be able to keep loan-to-value figures low,” says Norbert Sasse, Growthpoint Properties CEO.

That gap between yields and the cost of debt is likely to widen and those outside the REIT structure – ironically the major percentage of the market – are more likely to be impacted by cost of funding that is higher than yield,” says Mark Stevens, CEO of Fortress Income Fund.

“Those who are will migrate from private to institutional.”

A challenging macroeconomic backdrop aside, which includes the country’s rerated GDP growth projection of 0.7%, listed property is still doing relatively well, says Ken Reynolds, Gauteng regional executive for Property Finance at Nedbank Corporate and Investment Banking, and opportunities remain for the sector to maintain momentum and even growth.

“It is an investment class underpinned by physical property that will remain resilient over the long term,” says Rapp.

Cost of funding casualties may also provide the REITs with more buying opportunity. “When there is blood on the streets, it is a good time to buy property,” says Stevens.

Local property may still contribute the majority of distributable income, illustrated by Growthpoint’s 76.7%, but with the uptick in offshore momentum that too is likely to change.

A quality and well-diversified portfolio, one that has low levels of gearing and proper hedging and is conservatively managed, will make all the difference to future value proposition, says Guillaume Poitrinal, founder and chairman of ICAMAP and former CEO of Unibail-Radamco. “The future belongs to REITs with active management, great projects and low debt.”

Business must act as a force

“South Africa is in the grip of a crippling wilderness. It is a national imperative to find a way out of these doldrums,” Dr Reuel Khoza, president of the Institute of Directors of Southern Africa (IoDSA), chairman of Aka Capital, and former chairman of Nedbank Group Limited, told finweek at the 2016 SA REIT conference.

“The country requires a leadership that takes us into a prosperous future; a leadership that must demonstrate competence, not populism and doing what is in the national interest. That also means stopping creeping state capture dead in its tracks.”

Predictably, the country’s march into the abyss and the role of business to prevent this, and effect change to recapture the country’s growth dream, took centre stage at the 2016 SA REIT conference.

“The blatant inability of government to do anything with circumspection nags at us like a compulsive neurosis. Unless we do something it will plague us to junk status,” Khoza told business leaders at the conference.

Today, faced with a leadership vacuum and creeping state capture, South Africa has no destiny or compelling vision, and business needs to enter the fray, said Khoza. “Business is a force. It has to organise and stand up for our rights. This country cannot be allowed to drift.”

But business doesn’t often stand up to be counted, said Sara Gon, research fellow at the Institute of Race Relations. “There is no defence of capitalism,” she admonished. “Standing together you are much more likely to be heard and supported by others.”

SA REIT Association chairman Laurence Rapp conceded that there is a need for the industry to play a broader role in the wider political and economic debate. “We need to take up that challenge. It is a very clear message that we need to take forward.”

This article originally appeared in the 14 April 2016 edition of finweek. Buy and download the magazine here

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