The South African listed property sector continues to grow in leaps and bounds, with four new property companies expected to list on the JSE before the end of this year.
The listed sector’s overall market capitalisation has grown substantially in a decade to R234bn and the anticipated listing of new property companies is expected to add to the sector’s growth.
But while new listings are welcomed by the market as it gives investors more choices and access to previously unavailable real estate investment opportunities, the market will probably be looking for an investment case and value proposition before supporting any of the new listings.
Tower Property Fund was the first new fund to list on the main board of the JSE under the diversified Reits (real estate investment trusts) sector on July 19.
Tower managed to raise R300m for the listing.
Reits have been introduced into South Africa to bring the listed property sector in line with international standards and are tax-advantaged investment vehicles that invest in and derive their income from income-producing property and distribute rental income to unit or shareholders.
Tower had a successful debut on the JSE last week, closing at 1,000c, having listed at 870c. It is the first listing this year and is expected to be followed by a number of larger listings in the third and fourth quarters.
But in its monthly report for July, Catalyst Fund Managers warned many equity offerings from new listed companies were sweetened with commitment fees of 2% to 5% of the value subscribed for.
“In our opinion, the entire commitment fee on an equity offering should be passed onto the client portfolio on whose behalf the subscription was made. If not, a conflict of interest exists between the client and the fund manager,” Catalyst said.
It said the presence of external management companies in new listings must be treated with caution by investors.
“Any promoter-management company that brings a new investment opportunity to the sector should be rewarded for that, but investors also need to be adequately rewarded for the conflict of interest that the external management company agreement creates,” Catalyst said.
The fund manager said the charging of a straight management fee of 0.5%, when the listed company’s enterprise value exceeds a relevant inflection point that compensates and rewards the promoter or management company sufficiently, should be challenged by investors.
Management company buyback deals usually favour promoters and management company owners and can prejudice shareholders. This is what concerns analysts. “Investors should challenge the ‘norm’ internalisation mechanism. Transaction fees are completely unacceptable and are akin to listed property fund managers not passing on 100% of the commitment fee on equity offerings,” Catalyst said.
Grindrod Asset Management chief investment officer Ian Anderson said the current one-year forward yield on the South African-listed property sector had fallen to 6.6% and is almost 100 basis points below the yield on longer-dated government bonds.
“The gap is even larger when looking at the larger listed property companies, including Growthpoint (168 basis points), Hyprop (196 basis points) and Resilient (234 basis points).
There are, however, a number of listed property companies trading on initial yields in excess of the yield on longer-dated government bonds, suggesting there is still selective value in the listed property sector, at least relative to the bond market,” he said.