Cape Town - South Africa has a very mature, established, "grown-up" real estate investment trust (Reit) structure, which compares favourably with other Reit regulations in the world, according to James Wilkinson, European chief investment officer of global real estate securities group BlackRock.
The management teams of SA Reits compare favourably to those in other parts of the world, in his view, due to their transparency and being high quality experts in their field.
"Much of the best in real estate in SA moved from private to public markets over the years, so they give access to good quality, low risk assets," he told Fin24.
"All of these good aspects are necessary, however, not sufficient for investors to want to invest in a Reit in SA. For example, while there are some companies we think offer investment opportunity, the fundamentals in SA at moment face some challenges."
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Challenges include the economy not being strong at the moment and some question marks around the supply of office space.
"In markets where you have a steady supply coming through it will impact the amount of rental growth. Yes, there are still businesses moving into Johannesburg and urbanisation continues, but the ongoing level of supply is going to restrict rental growth for a period of time," he explained.
"SA, like any other country, is also grappling with changes in the retail landscape. Retailers are looking at business models when deciding where to take space."
He said that is why BlackRock looks to invest in the right assets in the right locations - the best demographics and the best areas.
"The current lack of economic growth and the political situation in SA are causing a lot of consumers and businesses not to make decisions. There is a feeling that a lot of people are waiting to see what happens in December before making big decisions," he said.
Challenges and opportunities
BlackRock is looking for companies where the share price is below what it judges to be the fair value.
"We focus on bottom up fundamentals. We truly have the ability to invest across sectors. So, we generally see priced opportunities in every sector," he said.
From a fundamental perspective he thinks the SA residential market is "interesting", especially the affordable residential market. This is because of a need for professional, high quality space and high quality management of that space in order to generate the best margins.
BlackRock is also keeping a watchful eye on the retail market and the development of e-commerce in SA.
"Although e-commerce in SA is long way behind the curve of developed markets (DMs), there is no doubt it will come. So, we will keep a close eye on the logistics space, because for e-commerce to work it needs high quality logistics in urban and semi-urban locations to deliver goods," said Wilkinson.
Blackrock is now also focusing on opportunities in listed infrastructure. From a geographic point of view it looks at Africa, and especially SA, too.
"Returns available from investing in bonds - especially sovereign bonds - are far lower than they have been historically. So, investors are looking to alternatives like real estate and infrastructure. These two sectors tend to provide relatively high, stable incomes and are less correlated with bonds and equities," he explained.
"Listed infrastructure is less mature than real estate, but it is growing and we anticipate it will grow significantly over the long term. The need for infrastructure is huge in DMs and EMs. It ranges from renewable power to roads, ports and airports."
An interesting crossover with real estate, in his view, is the sector of data centres.
"The need for data centres is growing hugely as data has to be stored for the future. The cloud is actually 'on the ground'," he said.
Low interest rates in, for instance the US, cause investors to look for yield in EMs.
"There is a misperception about the link between real estate and infrastructure on the one hand and interest rates on the other," said Wilkinson.
"The idea that real estate income is entirely bond-like is wrong. Real estate and infrastructure are actually pro-cyclical and it is therefore important to look at the fundamentals. Of course interest rates are important, but more important still are the fundamentals like demand for real estate supply or how confident businesses are about taking more space and paying more rental."
He explained that international investors like to focus and liquidity. In that regard he thinks maybe the consolidation of smaller Reits in SA might have positive results.
"In terms of infrastructure the question all around the world is how private capital is going to be regulated. For example, an 'infrastructure Reit' with tax transparency could be an interesting concept," said Wilkinson.
"It is apparent to us at BlackRock that governments are going to need to partner with the private sector and need to facilitate and enable with the right investment structures and the right regulation."
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