Reits tipped to grow in leaps and bounds

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.

REITS may revive property sector

Business Day – 25 July 2013

WITH 45 property groups now listed on the JSE, the sector has substantially grown in stature over the past decade and is expected to grow further thanks to favourable market conditions and the new real estate investment trust (Reit) structure.

Although still a small proportion compared to other stock markets, the local listed property sector now accounts for 3.8% of the JSE’s total market capitalisation — a much larger number than a decade ago.

The latest milestone for the sector is the listing of Tower Property Fund last week, which was the first new property entity to list under the Reit structure.

Over the past three years, 16 property companies and funds have listed. This, along with Reit legislation, is expected to spur some consolidation.

The internationally recognised Reit structure was adopted in South Africa in April, and many existing listings have already converted.

Its benefits include a simpler and more clear-cut tax regime for funds and companies, and the removal of capital gains tax.

Zeona Jacobs, director of issuer and investor relations at the JSE, said last week the sector “has enjoyed tremendous growth in the past 10 years and is one that South African investors understand well”.

According to the JSE, the sector has grown more than fivefold over the past decade — from R61bn at the end of June 2003 to R328bn at the end of last month. Analysts expect the Reit structure to further grow the sector.

Growthpoint Properties executive director Estienne de Klerk said at the IPD Property Investment Conference last week that Growthpoint, which is the listed sector’s biggest counter and is included in the JSE’s top-40 index, has grown its market capitalisation from only R30m in 2002 to about R50bn.

With Growthpoint’s rapid growth, its foreign investor base has grown from 3% in 2009 to about 17%.

But while South Africa’s listed property sector has developed substantially, the sector’s contribution to the JSE is still well behind more developed markets, where listed property makes up “closer to 10%” of overall stock markets, Mr de Klerk says. He says Reit legislation and a number of planned new listings will see continued growth in the sector.

Despite the relatively small weighting of listed property on the JSE, South Africa’s Reit market is expected to be the eighth-largest in the world. Mr de Klerk says Growthpoint is about the 40th-largest Reit in the world, and about the 15th-biggest if US Reits are excluded.

Anton de Goede, fund manager at Coronation Fund Managers, said at the IPD conference that new listings will need to bring something new to the market, given that most recent listings have had similar focuses.

He says that while Reits remove tax uncertainties, the structure is not likely to be “a real game changer” with regard to foreign investment.

But foreign shareholding of South Africa’s listed property sector is well below the shareholding of other sectors on the JSE.

With foreign ownership in the sector ranging between zero and 17%, the possibility for more foreign investment “does exist”.

However, foreign investors are only likely to target the JSE’s “top five or 10” listed property counters, as these stocks are the only ones offering sufficient size and liquidity.

Catalyst Fund Managers investment manager Paul Duncan says with Reits as the catalyst, there is scope for listed property to grow its proportionate size on the JSE.

But it is difficult to determine by how much. “There’s still a lot of direct real estate owned by institutions and unlisted funds that — with the introduction of the Reit legislation — may look to list their vehicles,” he says.

This is largely thanks to the capital gains tax relief that comes with being a Reit, as well as the advantages of being listed, such as access to funding.

On the debt markets, banks are also “comfortable” with Reits now — more so than with unlisted funds, says Mr Duncan.

He says Reits also “tend to be lower geared and so they are easier to borrow against”.

Mr Duncan says the potential for increased foreign investment into local listed property is more a function of valuations than Reits. While Reit legislation eliminates some barriers to foreign interest, “South African listed real estate is not attractive relative to global listed real estate right now”.

However, “when it does become cheap, at least now they can invest in a Reit rather than a property loan stock company.”



The first new property listing under the REIT structure

WITH a JSE listing planned for July, Tower Property Fund intends to be the first new property listing under the JSE’s recently launched real estate investment trust (Reit) structure.

The fund’s debut on the JSE would see it joining 12 other property listings since 2011 — and more are expected to follow. Although other listed groups have converted to the new Reit structure, Tower would be the first new fund to list as a Reit.

At listing, the fund’s property portfolio will consist of 27 properties valued at R1.65bn. The portfolio includes the mixed-use Cape Quarter complex in Green Point, Cape Town, as well as a five-star green star-rated office complex in Grayston Drive, Sandton.

Tower is being launched by Spire Property Group and partners, and has an experienced management team with a successful track record — Spire successfully listed Paramount Property Fund, which grew to R3.5bn when it was sold to Growthpoint Properties in 2006.

Its management has announced a strong focus on basic “greening initiatives” and other energy-saving measures to reduce occupancy costs.

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