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Offshore property stocks: the investment case

Global stocks look more attractive on prospects and valuations.

The local listed property market continues to hold its own, as the investment class has outperformed global property stocks – both in rand and dollar terms.

Latest figures from UBS Global Real Estate Investors Index suggest that global property stocks or real estate investment trust (REITs) as they are commonly known, delivered a total return of 6.47% in rand and 5.74% in dollars year to date (January to February 13).

That compares with local stocks in the same period amassing total returns of 9.32% in rand and 8.57% in dollars.

Despite the outperformance by local stocks, property fund managers believe that there is room for both local and global property stocks in a portfolio, but the latter still looks more attractive on prospects and valuations.

Keillen Ndlovu, Stanlib’s head of listed property funds, says global property stocks look attractive in terms of yield, income growth and net asset value (NAV).

On yield basis developed markets offer an average forward yield of 3.5% in dollars. “A 3.5% yield is comfortably above global bond yields and way above cash yields,” says Ndlovu.

Ndlovu notes that global listed property is trading at a premium to NAV of about 8% while local property stocks are trading at a premium of 30%, “with less exciting fundamentals”.

Developed property markets are showing growth in rental and supply, and demand dynamics are poised for growth across most sectors and regions. “Global property earnings are expected to grow at about 7.4% (in dollars) over the next 12 months,” Ndlovu adds.

Developed markets have sector-specific REITs with some property counters focusing on residential, hotels, storage, data centres and hospitals. South Africa is only playing catch-up to developed REIT countries, with commentators expecting more diverse REITs beyond office, retail and industrial focus in the medium to long term. 

Cherry picking counters

JSE-listed rand hedge property stocks such as Romanian-focused New Europe Property Investments (Nepi) and Rockcastle Global Real Estate Company (Rockcastle) were some of the best performers in 2014.

Offshore property counters have also seen an increase in deal flow, with a number of acquisitions already concluded. Redefine International in January announced that it had completed the acquisition of 56 retail properties in Germany valued at €156.8 million (R2 billion). Nepi has bought malls in Romania and has eyed Eastern Europe as an attractive property development jurisdiction.

“We believe Nepi has one of the top management teams in the world and their development pipeline should enable above average earnings growth over the medium term,” says Sesfikile Capital director Kundayi Munzara.

Rockcastle announced its foray into Poland, where it will develop a retail centre.

Evan Robins, listed property manager for Old Mutual Investment Group’s MacroSolutions boutique, says low interest rates in Europe and the US bode well for global property stocks.

“Companies can buy property at yields not that different to what they can buy locally but fund this at very cheap debt levels as global interest rates are so low. This means acquisitions can be immediately earnings enhancing,” says Robins.

The test will be the quality of assets these counters buy in terms of prospects for rental growth and renewal of leases, he adds. 

Mas Real Estate is another counter to eye, Ndlovu says, given its recent move from the AltX to the main board on the JSE making it more visible to investors. Investec Australia’s long leases in the office sector with “good quality” tenants is also a good bet, he says.

Outlook

Global REITs are poised for sustained outperformance over the next two to three years, due to better macroeconomic fundamentals. Munzara says the announcement by the European Central Bank of its €60 billion (R795 billion) asset purchase programme until 2016 is a game changer for global stocks. The slide in the oil price also decreased CPI expectations globally, resulting in consensus shifting among investors of prolonged lower interest rates.

“The US and UK are particularly strong and debt availability is increasing which will support valuations and earnings going forward,” Munzara adds.

For more information on trading offshore, visit Standard Bank’s Webtrader platform here.

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