South Africa’s JSE-listed property sector (worth more than R300 billion), is expected to see more consolidation in the medium to long term, after a rousing year of deal-making in 2014.
This is as more funds are planning to make a debut on the local bourse, to continue the sector’s listing spree which has been robust for about four years.
Speaking at the annual South African Property Owners Association’s (Sapoa) International Convention on Wednesday, director of Rockcastle Global Real Estate Craig Hallowes says there is room for further consolidation, as smaller market capitalisation funds are coming into the market.
“You have seen the proliferation in the last couple of years of smaller funds coming to market now and there is that argument about the threshold size of a small fund should be R300 million. I think the threshold is between R3 billion to 5 billion. I certainly think that smaller funds should consolidate,” says Hallowes.
For now, the sector is expecting two more property listings before the year ends. Arrowhead Properties is in the process of listing its residential subsidiary Indluplace in June – dubbed as listed property’s first residential-focused fund.
It will bring a residential portfolio to market worth R1.5 billion, as the company has been acquisitive in recent years.
Arrowhead Chief Operating Officer Mark Kaplan says a lot of funds are constantly on the prowl for opportunities away from the office and retail sector – a diversification strategy.
Pivotal Property Fund is on route to bringing an Africa-focused fund through the inward listing of Mara Diversified Property Holdings (Maradph) on the AltX. Maradph will have a primary listing in Mauritius and Pivotal will open the shareholding structure of the fund to local investors.
The expected consolidation within the property sector will see bigger listed funds growing their asset base. Hallowes says the bigger the fund, the more sense it makes to invest in them. However, the appeal of listing in smaller funds is starting to dim.
Not only are bigger funds looking to acquire smaller listed funds for growth, but they are diversifying across new frontiers. Property counters, says Hallowes, are consolidating their balance sheet (cutting costs and creating efficiencies) to drive growth – as some are already looking at markets outside South Africa for their growth ambitions.
“Countries outside South Africa offer better returns. Nigeria and Europe, for example, offers hard currency returns of 5% to 8% and it’s better than the low economic growth in South Africa,” Hallowes explains. South Africa’s economy is expected to expand by at least 2% in 2015.
More specialist REITS
South Africa’s listed property sector has matured over the years, as the Real Estate Investment Trust (REIT) dispensation has brought the sector in line with international best practices.
Arrowhead’s residential listing is expected to attract more specialist REITs locally. The US is considered a mature REIT market, as real estate practice leader at PwC Byron Carlock says REITs in the country span to agriculture, hospitality, crowd funding, mortgage and more.
However, traditional sectors such as “retail, office and industrial REITs remain bigger because of their size.
Despite the consolidation concerns and companies looking outside of South Africa for growth, the listed property sector still holds its own. Investors in the sector have been coining it, as it amassed strong total returns (including dividends) just in 2014. The South African Property Index (Sapy) for the year ended December 31 delivered a 26.6% total return, surpassing the All Share Index, which only returned 10.9% in 2014.
Figures from Stanlib suggest that in 2014, the sector saw a record R40 billion raised in new listings, dividend re-investments and private placements.
The writer is part of a sponsored trip by Sapoa to the annual Sapoa International Convention.