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Cashing in on Aussie’s resilient economy

Investec wins while the UK and Europe are plagued by uncertainty.

The love affair with offshore markets by South African investors has largely been in the UK and most recently Central and Eastern Europe (CEE) while Australia hasn’t been on their radar.

With negative sentiment growing towards the UK given Brexit and growing concerns about limited quality assets in CEE regions, the search for alternative investment regions has been heightened.

The search may point income-chasing investors to Australia as the country’s economy appears to be resilient.

Australia’s GDP grew by 3.3% over the 2015/16 financial year (the fastest rate of growth in the last four years), inflation remains below the target range of 2% to 3%, interest rates remain low and employment is on the rise.

A counter that is cashing in on these dynamics is Investec Australia Property Fund (IAPF), the JSE’s only pure Australian-focused property play.

Although the recent rand strength has sent long-favoured offshore counters such as Capital & Counties, Capital and Regional, Intu Properties and Redefine International crashing, with their stocks delivering negative total returns of more than 30%, IAPF is the antithesis.

Latest figures from Cape-based Catalyst Fund Managers show that IAPF’s stock has delivered positive total returns of 15.9% for the year to October 31, outperforming the SA Listed Property Index’s 9.37%. And since listing in 2013, IAPF has delivered a total return of 85.2% in rand terms.

Solid performance

Most industry players positively rate IAPF on two counts: solid operational performance and hard currency earnings.  On the latter, the counter delivered dividend growth of 6% (before tax) to 4.81 cents per share for the six months to September 30.

CEO Graeme Katz says the company’s earnings are a testament to its strategy of acquiring quality property assets. “We have invested in good properties with long leases, sustainable rental income and good quality tenants. And this has paid off,” Katz tells Moneyweb.

The fund, which is more than 17% held by investment bank Investec, has been aggressive with its growth targets. The value of IAPF’s property portfolio of eight logistics, warehouse and office properties has grown from A$129.9 million (R1.4 billion in rand terms) two years ago to A$601.2 million (R6.4 billion).

The counter owns 21 properties in boroughs such as New South Wales, Victoria and Queensland valued at A$601.2 million (R6.4 billion). 

It has also been busy on the deal-making front, having bid on assets worth A$1.5 billion of assets during the reporting period.  

Its bid resulted in the purchase of Macquarie Park (an office park) in Sydney, New South Wales for A$23 million (R247 million) at a yield of 7%. The property is near Sydney’s planned underground metro railway linking Sydney CBD to other outlying areas.

A recent coup for IAPF has been the acquisition of a 50% share in an office property at 324 Queen Street, Brisbane for which it shelled out A$66 million (R707 million). The property is believed to be a sought-after office in Australia.

Ultimately, Katz is aiming for IAPF’s property portfolio to be valued at A$1 billion (R10 billion) in the next three years. IAFP’s portfolio has an occupancy rate of 98% and average lease expiry of 5.5 years and achieves rental escalations of 3.4%. 

Its deal-making has resulted in the rise of gearing to 38.9% from 28.8% earlier this year. Katz says the company has the capacity to raise gearing levels to 50% through its debt facilities if deals become available in the market.

Competition

But Australia’s market is becoming competitive with global capital chasing assets. IAPF has attempted to introduce stand-alone retail properties for over three years without success due to asset values fetching hefty premiums.

Says IAPF’s manager Zach McHerron: “There is also a reduced level of stock in the market as vendors are reluctant to sell assets.”

Despite this, Katz believes that properties can be bought at average yields of 8% while debt funding costs can be low as 3%. SA is the opposite as the cost of debt is higher than yields on properties – nearly 10% vs below 8%.

Australia’s economy is also highly dependent on the demand for volatile commodities, leaving some investors worried about the country’s prospects.

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this is exactly why I am 100% against these REIT’s listed in sa investing offshore. I live in aus – yet all my investments are off shore – why? because the aus$ is overvalued and is slowly coming down. so while its overvalued I have been moving money offshore. for o’seas investors its quite the opposite. as regards these properties – Macquarie park etc. I know these properties and wouldn’t go anywhere them. aus has one of the highest level of domestic debt in the world – IF int rates go up – this will be very bad news for households. please note you guys have very HIGH GOVT DEBT which unfortunately means your taxes are sky high – and going higher

Mmm….ok.

So, tell us:

1] Where are you investing offshore ?
2] A little bit of insight into why you wouldnt touch Macquarie Park etc ?

see above

Robert

A while ago you noted that the only way to get rich in Australia was to borrow up to your gills and buy residential property.

Now you say your money is overseas.

If you believe that the AUD is over valued why don’t you just borrow a lot in Oz and invest in US$ treasuries? Wait for the fall and get rich.

From a South African perspective Aussie REITS such as SGP ($4.15, yield 5.9%) and SCG ($4.11 yield 5.1%) would offer good value to a South African investor. The Rand is a one way bet against the AUD as the same commodity factors drive both but the AUD is less volatile and inflation in AUD is about 3%.

NEVER that’s NEVER borrow to invest – rule 1!i started moving funds off shore into us$ abt 2 months ago when the aus$ rate was .78 to us$. today I got .728 – that’s a 10% drop or in my case 10% increase before my us investment movements. so that’s issue no 1 – the US dollar is on a role and will be for sometime. interest rates are going up so you do not want highly geared investments AND ALL these property investments are highly geared

No

I wont touch Australian property.

It’s the biggest bubble in their history and it due to burst in coming months.

yes – BUT have to break up property markets. residential – biggest bubble BUT history has shown that Sydney and Melbourne property markets are very resilient. would expect a stabilising of the annual 10% increases we have had over past 4 years. as regards commercial – won’t touch it!

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