Brexit: Market rout thumps local property counters

Industry players are pricing in more volatility.

Although the stocks of property companies with UK investments have been aggressively sold down since the Brexit vote, South African property companies hitching their wagons to offshore markets have also not been spared.

The market rating of rand hedges Capital & Counties (Capco) and Capital & Regional (Capreg), have cemented both companies as casualties from the UK’s imminent exit from the 28-member bloc.

Underscoring this is that at the time of writing, the stock of Capco, which owns iconic London landmark Covent Garden and Capreg, a shopping mall owner in the UK, has fallen by 33.27% and 27.22% on the JSE respectively over the past month.

Local property counters with investments in the UK and greater parts of Europe are in a similar boat. Among those hit is Texton Property Fund, whose stock has fallen by 12.71%. See other counters below.

The JSE sell down of South African companies exposed to the UK and greater Europe over the past month
Company Market cap Sell down (-%)
Texton Property Fund  R2.9 billion 12.71%
Vukile Property Fund R11.6 billion 4.12%
Accelerate Property Fund R5.1 billion 3.7%
Tower Property Fund  R2.5 billion 3.37%
Attacq Limited R13.7 billion 4.02%

Source: Moneyweb.

The company, in which retail baron Christo Wiese is a major shareholder, plans to increase its UK assets to 50% of its R5.9 billion property portfolio from the current 45%, while the balance will be made up of properties in South Africa. 

In a recent company note, CEO Angelique de Rauville said post its recent acquisitions of industrial and retail park properties, by revenue the UK is expected to comprise below 35% of Texton’s total revenue.

Also in the firing line is Vukile Property Fund, with jittery investors sending the stock down by 4.12%. Vukile has a 26% stake in Atlantic Leaf Properties, which owns mostly retail warehouses and distribution centres in the UK across outlying towns such as Redditch and Nuneaton.  Vukile’s UK exposure through Atlantic Leaf is worth around R700 million of its total portfolio value of about R16.7 billion.

The share price of other counters like sector heavyweight Redefine Properties, which is exposed to the UK and Germany through its 30.1% stake in JSE- and LSE-listed Redefine International, and retail focused-Rebosis Property Fund, which holds a 62% stake in UK mall owner New Frontier Properties, have both recovered since June.

Meago Asset Managers director Jay Padayatchi said there are concerns about stocks that have exposure to the UK real estate sector and the uncertainty around Brexit may “be the subject of much speculation and market volatility for months to come.”

The ongoing weakness of the British pound against the US dollar by nearly 10% over the past month, has further knocked investor sentiment. Padayatchi said the currency wasn’t helped by UK property funds that have written down their assets and those that froze withdrawals, as panicked investors looked to dump real estate holdings.

“The uncertainty on the political outlook is clearly adding to the uncertainty and understandably a flight to safety seems like the obvious choice,” he told Moneyweb.

Strong investment case

Industry players are already forecasting that the UK’s imminent exit from the EU, which is expected to still be two years in the making, might nudge the country’s economy into a recession.

But Nesi Chetty, head of listed property at Momentum SP Reid Securities said fundamentals into London’s property market are still sound. Chetty said rentals in the region are growing and are commanding “high asking prices” in line with other developed markets such as the US. “Central London property values will likely hold up well,” he added.

The fact that the Bank of England has suggested that interest rates may need to be cut further, might be favourable for the real estate sector.  “A low-interest rate environment would be supportive of consumer spending and should benefit property values in the long term. There could be attractive buying opportunities from the Brexit fallout for some companies,” said Chetty. 

EU exit contagion

Grindrod Asset Management chief investment officer Ian Anderson said a bigger issue for South African property stocks is the impact a Brexit might have periphery EU members that are at most risk from a large-scale break-up of the bloc. Those periphery members might be those in Eastern Europe.

It appears that the market is already pricing in this risk. The stock of property counters such as Accelerate Property Fund, Tower Property Fund and Attacq Limited, which have recently invested in Central and Eastern Europe markets such as Austria and Slovakia, Poland and Cyprus respectively, have also been hit.  See table above.

“There is no question that other EU member states will be forced to hold their own referendums over the next 12 to 18 months,” said Anderson.  

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well I cld say “I told you so” – but I won’t (for the moment)

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