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Offshore property stocks: Investors see more pain

The market darlings of last year have morphed into big losers.

Income-chasing investors may have been tempted to ditch SA-focused property stocks for offshore ones given their rousing performance and hard-currency earnings last year.

It wouldn’t be hard to see why, as seven of the biggest offshore property stocks on the JSE delivered total returns of more than 30%.  These long-favoured stocks by property punters include New Europe Property Investments, Capital & Counties, Capital and Regional, Rockcastle, Sirius Real Estate, Tradehold, and Atlantic Leaf.

Hitching your wagons to offshore markets was compelling given SA’s worrying state of the economy, currency weakness that boosts offshore earnings in rand terms, and low-interest rates globally.

But ten months later, offshore property stocks have emerged as the worst performers due to a stronger rand – up by 10.5% in the year to October 28. Offshore counters are more sensitive to rand movements than local property companies.

Latest figures show that about 40% of SA’s listed property sector’s earnings derive from offshore markets (mainly Central and Eastern Europe), while the sector had no offshore exposure ten years ago. More than nine offshore property companies have listed on the local bourse in the past 12 months, in what market watchers say is an insatiable appetite for offshore markets by South African investors.

A look at individual property stocks indicates that last year’s winners (offshore counters) are now losers. The biggest among the losers are UK-focused Capital & Counties (Capco) and Capital and Regional (Cap Reg), which have delivered a negative total return of 52% and 33% respectively in the year to October 25.

Latest data from Catalyst Fund Managers show that in the year to September other big losers include UK-focused Atlantic Leaf (-31.4%), owner of shopping malls in the UK Intu Properties (26.7%), Germany and UK-focused Stenprop and Christo Wiese’s Tradehold (-24.8%) – wiping all the stellar gains they made last year.

The losses of Capco, Cap Reg and other companies exposed to the UK is linked to the country’s glum economic prospects following the Brexit vote, with jittery investors aggressively selling down their stocks since June.

These jitters have also impacted the South African Listed Property Index (Sapy index), which includes the JSE’s largest 20 real estate companies. According to Stanlib, the index has delivered total returns of 9.9% in the year to October 25, well below the 15.1% amassed by bonds (ten-year government bonds).  Read more here.

The investment case for going offshore

The big question is whether offshore property stocks are still a good bet.

For Stanlib’s head of listed property funds Keillen Ndlovu, the offshore markets story is still intact, especially in London which has been experiencing record-low vacancies on properties.

Ndlovu says most of the UK-focused property developers that Stanlib has backed such as Hammerson (recently listed on the JSE), London Stock Exchange-listed British Land and Capo have been reducing their debt levels, extending their debt maturity profiles and property development pipelines.

Although offshore property companies give investors the opportunity to diversify away from the risks perceived with South Africa’s investment landscape, Metope Investment Managers CEO Liliane Barnard says investors must exercise caution.

Going offshore, after all, brings a different set of risks such as currency fluctuations, which can impact rand-based earrings, and the exposure to unfamiliar economies.

“Investors need to assess these companies and deals on a case-by-case basis, based on the merits of these assets. South African managers that invest offshore need to show a thorough understanding and/or a competitive advantage in these markets in order to justify their investments in these jurisdictions,” Barnard tells Moneyweb.

Catalyst Fund Managers portfolio manager Zayd Sulaiman supports Barnard’s view adding that it’s all about checking company fundamentals such as strong management teams and quality property portfolios that are resilient in the long-term.

In recent months South African property companies – including sector heavyweight Redefine Properties, blue-chip mall owner Hyprop Investments, property developer Attacq, mid-cap Tower Property and others – have concluded deals largely in Central and Eastern Europe. The big drawcard to this region has been low-interest rates (on average 3%) and higher yields on properties (more than 7%) and rand-hedge earnings, which boosts dividend payouts to investors in year-one after concluding deals.

Sulaiman says investors must be discerning about which property counters to back as “everyone is chasing the same assets in offshore markets and there’s a risk of overpaying for assets.”

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can’t say you weren’t warned by moi! “favourite” one was capco once controlled by sir Donald Gordon of Liberty life – he himself has lost massive amts of money thru these uk property investmnets. just recently we had eastern Europe (Poland?) being the greatest thing then there was Mauritius. fails all my tests for investment (can’t get out with a phone call). but as I have warned ad nauseum – beware the carpet baggers

It’s easy to be wise after the fact – hindsight is perfect vision. But what did you say before then? before Brexit?

on the contrary I always expressed my extreme disdain for these REIT’s that are listed in sa, then listed somewhere else – lots of fees along the way – and the end investment is not what you expected in the 1st place. IF you had been listening to what I was saying – the safest off shore investment (until a month ago) was us treasury 10 yr bonds – to an sa investor would have been 50%. the bond market started turning abt a month ago – then it was tine to get into nyse.

End of comments.





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