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Offshore property stocks still a good bet for 2016

What the fund managers have to say.
Fund managers are upbeat by offshore property stocks and discerning when it comes to SA counters.

JOHANNESBURG – Betting on JSE-listed property stocks with offshore exposure last year proved rewarding for income-chasing investors.

In fact, the three best-performing property stocks either solely invested in markets beyond SA or have exposure to the domestic market but are hedging their bets offshore.

Fortress Income Fund B-linked shares has been the best-performing property stock for two years running among the 40-odd real estate counters on the JSE, notching up a capital return of 103.29% (including dividends) for 2015.

Fortress owns shopping centres across SA and has offshore equity holdings in sister funds New Europe Property Investments (Nepi), rand hedge Rockcastle Global Real Estate Company and London Stock Exchange-listed Hammerson. 

Romania-focused Nepi and UK shopping centre owner Capital and Counties (Capco) delivered total returns of 62% and 56% respectively.

The recovery of the UK and Eurozone economies, cheaper borrowing costs and higher acquisition yields on properties in various jurisdictions – as well as rand weakness – all contributed to the bull run of offshore stocks.

For the 12 months to December 31 2015, the South African currency weakened against the dollar, pound and euro by 33.37%, 26.46% and 18.93%, respectively.

Not only offshore stocks shot the lights out but even property indices outperformed that of SA. On a global scale, the UK was the top performing Real Estate Investment Trust (Reit) market delivering total returns of 42%, figures from Avior Capital Markets show. See full ranking below.

Total return by Reit market (ZAR)

 

Ranking

Market

Total return

1

United Kingdom

42%

2

Europe

40%

3

United States

38%

4

Australia

36%

5

Asia

24%

6

South Africa

8%

Source: Avior Capital Markets.

The FTSE/JSE SA Listed Property (Sapy) Index delivered a total return of 8% (including dividends) for the period – three times lower than the 2014 performance of 26.6%. The sector still managed to trump the return of the JSE All Share Index (5.1%), cash (6.5%) and bonds (-3.6%).

Stock picks

Moneyweb asked two fund managers for their property stock picks for 2016 along with reasons for their choices. CEO of Cape-based Metope Investment Managers Liliane Barnard, went with Nepi and Capco. Nepi has had a strong run in its share price over the last five years and still offers strong distribution growth. Barnard says this is on the back of its pipeline of dominant retail centres in Romania and other Eastern European cities, such as Slovakia and Serbia, at substantial yields above funding costs.

Capco has long been regarded for its prime properties in central London, which include the mixed-use precinct Covent Garden and the company’s rejuvenation of Earl’s Court into an urban precinct to rival cosmopolitan Chelsea and Kensington. 

Following the sell-off in December after the abrupt sacking of former finance minister Nhlanhla Nene, which spooked markets and investor sentiment towards SA, Barnard says a number of SA property counters are offering good value on a yield basis.

She punts government office owner Delta Property Fund, which is trading at a forward yield of 13% – relative to the sector’s 6% – making it an attractive and affordable play. 

Although sector heavyweights Growthpoint Properties and Redefine Properties underperformed the market in 2015, Barnard says they are starting to look attractive with forward yields of around 7.75% to 9%, while also maintaining inflation-beating dividend growth.

On the radar of Avior Capital Markets’, at current levels, are blue-chip mall owner Hyprop Investments, Rockcastle, soon-to-be retail-focused counter Rebosis Property Fund and Redefine. Says Avior’s equity analyst Adrian Jardine: “We also find deep value in development companies such as Attacq Limited and The Pivotal Fund, who have suffered the brunt of weakening demand.”

Attacq and Pivotal, which are capital growth plays, are among the worst performers with a negative total return of 17% and 3% respectively. “We see attractive risk-reward in these stocks and believe that excessive pessimism has been priced in at current levels,” Jardine adds.

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Show these stats vs the drop in ZAR so that we can see the real performance of the funds.

as I say abt my clients every January – “what new ways to lose money will they find this year “? appears the author of this article has found yet another way! apparently a number of these “off-shore” property funds are based in sunny Mauritius -where they not take a large amount of yr money as fees BUT then then simply re-invest in other property trusts – who in turn take their cut. then you come to liquidity – if you want to get out – are there buyers willing to buy at “any” price? so where do i put my money? – us treasury bonds paying all of 2.04% BUT it is 100% safe AND will get impact of rand devaluation

End of comments.

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