Investec Property Fund has doubled its assets under management to a hefty R17 billion in the year to March 2016 – in what has been a transformative one for the property counter.
Most of the growth for Investec Property Fund, which was born out of investment bank Investec, has derived from its rousing the deal-making in the past year.
No doubt the biggest deal concluded by the company since its four-year history of listing on the JSE has been the acquisition of the property portfolio of developer Zenprop for R7.1 billion. The deal, which is considered as a coup for the company, saw it double its property value from R8.7 billion to R17 billion.
This was a second deal that CEO Nick Riley sealed since being at the helm of the fund in January 2015, replacing industry veteran Sam Leon.
Another deal which has added scale for the company in 2015 has been the acquisition of 22 properties of largely industrial assets based in Gauteng and the Western Cape, acquired from real estate group Griffin Holdings to the tune of R826 million.
“It has been a transformative year for the company with quality acquisitions. Our focus has been not only on quality properties with low vacancies and long-term lease expiries,” says Riley, who is not a newbie to SA’s listed property sector having spent nine years in Investec’s corporate finance division with clients in the real estate sector.
“The Zenprop and Griffen deals have enhanced the real estate fundamentals of the fund,” says Riley.
Evan Robins, listed property manager for Old Mutual Investment Group’s MacroSolutions boutique tells Moneyweb: “Investec Property Fund’s like-on-like property growth was notably strong considering the market.”
Income-chasing investors have been rewarded a 6.1% growth in the full-year dividend pay out of 124.66 cents per share – exceeding market consensus and its expectations.
Among the factors that boosted its dividend pay out include a 8.2% growth in net property income and a 21.3% increase in earnings from sister fund and rand hedge Investec Australia Property Fund, in which Investec Property Fund holds a 12.3% stake.
But active deal-making comes at a cost, as the company’s recent sizable acquisitions are expected to dilute the growth in its dividend pay outs for 2017. Riley says the company expects similar dividend growth for next year (at levels of about 6%).
“Management has been quite transparent with the market with regards to the impact of the Zenprop transaction and this result and the guidance for full year 2017 should, therefore, come as no surprise,” says Grindrod Asset Management’s chief investment officer Ian Anderson.
This comes at a time when SA’s listed property companies are downgrading their dividend growth due to the worrying state of the country’s economy.
In response, a number of property companies have recently concluded offshore deals largely in central and Eastern Europe to buffer against difficult domestic conditions. Riley says the company will continue to invest in Australia through Investec Australia Property Fund. “This does not mean that we are not looking for property deals. We continue to look for deals,” he says.
Anderson says the company’s blended cost of capital today is approximately 9%, which “will make deal-making more difficult or lead to further dilution in distributions if the company continues to acquire high-quality assets.”
“The high-quality nature of the properties acquired by Investec Property Fund leave little opportunity to add value through redevelopment, which is a constant source of strong growth for a number of other Real Estate Investment Trusts (REITs) in the sector,” says Anderson.
The company’s association with Investec puts it in good stead, as it has further options to acquire a secure pipeline of properties in the investment bank’s network.
Investec Property Fund’s property portfolio including flagship assets such as The Firs in Rosebank, the Balfour Park shopping centre in Johannesburg, Dihlabeng Mall in the Free State and Investec’s head offices in Pretoria and Cape Town, saw a 1.1% vacancy rate for the period under review. “This appears to be the lowest vacancy in the sector compared to that of peers,” Riley adds. The mid-cap counter also saw rental escalations of 7.8% and 39% if its leases expire after five years.
Trading at a forward yield of about 9%, Investec Property Fund’s stock looks cheap and affordable compared to the listed property sector’s average of 7.7%.