The unprecedented run of SA’s listed property in recent years has firmly placed the more than R600 billion sector as a separate asset class. But it’s now becoming difficult to find value in listed property, as some property stocks appear to be frothy. And no doubt that most industry players would probably agree that the sector is at the top of the cycle.
This is in light of a 20.21% rise in total returns the FTSE/JSE SA Listed Property benchmark index has delivered for the 12 months to October, according to the latest figures from Cape-based Catalyst Fund Managers. Listed property has been the top performing asset class, comfortably outperforming equities, bonds and cash (see table below).
But listed property in SA is increasingly viewed as expensive given that it’s trading at a forward yield of 7% compared with 8% for bond yields.
However, questions are emerging as to whether the sector’s valuations are justified, at a time when the 40-odd JSE property companies will find it difficult to deliver inflation-beating dividend growth for income-chasing investors.
You don’t have to look far for reasons behind the bearish sentiments: largely the worrying state of SA’s economy and quality property opportunities drying up.
Property companies are now mulling new growth frontiers and the search is pointing them further into the African continent to diversify income streams.
Sector heavyweight Growthpoint Properties recently announced that it is assembling an Africa-focused real estate investment vehicle in a joint venture with Investec Asset Management. The move into the continent has been years in the making as CEO Norbert Sasse says the company needed the right partner for such investments. “It’s fair to say that the dynamics right now in SA are not conducive to necessarily buying a lot. We already have got significant scale in the market,” he says.
Growthpoint will invest US$40 million (R560 million) in real estate investments in Namibia, Zambia, Nigeria, Ghana, Morocco and others.
Specialist African real estate offering Delta Africa, which manages properties over US$400 million (R5.6 billion) in Mozambique and Morocco, is bolstering its investments into the continent. Last week it announced an agreement to merge with Mara Diversified Property Holdings, assembled by Pivotal Property Fund. A successful merger will see Delta Africa acquire Pivotal’s 45.5% stake in Buffalo Mall in Kenya for US$6.7 million (R93.3 million) and an office development in Nigeria, adding scale to the company.
Another big-ticket transaction includes the purchase by Hyprop Investments and Attacq Limited of the 22 000-square metre Ikeja City Mall in Nigeria. Mall-owner Hyprop has acquired a 75% stake in Ikeja City Mall and capital growth fund Attacq has acquired the remaining 25%, marking their foray into Nigeria.
But market watchers warn that counters looking to invest in the continent must adopt a cautious approach, given the downturn in commodity markets, political uncertainty and currency weakness across African markets.
As Meago Asset Managers director Jay Padayatchi puts it: “While there are still significant opportunities in Africa, it looks like the risks are yet to be fully understood and some hedging strategies on the back of this will require refinement.”
Padayatchi adds that further pressure points include the strain that resource-dependent African countries are facing and South African retailers feeling the pinch outside of home.
Despite the short-term volatility of African markets, the sector head for property at Investec Asset Management Peter Clark says these challenges create an attractive entry point into the next growth phase of the market.
“The asset class provides an attractive risk-return proposition with stable income streams derived from high-quality assets with multinational tenants paying hard currency rentals on long-term leases,” Clark explains.
There seem to be real estate opportunities further into the continent, as many regions are underserved with quality shopping malls, offices and industrial space, says Stanlib’s head of listed property funds Keillen Ndlovu.
“In the long run the investment case should pay off given the right property fundamentals are adhered to from the onset, for example, quality properties, quality location and quality tenants.”
The negative spinoff to the underserved real estate is that it drives the pricing of assets up – even higher than the price being paid in SA for similar quality assets, says Grindrod Asset Management chief investment officer Ian Anderson.
To illustrate the pricing point, Anderson says Hyprop and Attacq’s acquisition of Ikeja City Mall in Nigeria was concluded at a price that was just under R60 000/square metre. This is 10% higher than the latest valuation of Hyprop’s flagship asset: the 156 689-square metre Canal Walk Shopping Centre in Cape Town.
The long-term growth story of the continent remains firmly intact, driven by attractive demographics, urbanisation, formalising retail markets and the growing consumer, says Clark.