In listed property, the dictum ‘size matters’ has always rung true, as investors typically have a bias towards bigger size and liquidity.
And no doubt more investors will be lured into rand hedge play Redefine International, which announced significant acquisitions on Monday.
In a transaction mooted to be among the biggest this year in the JSE’s more than R500 billion real estate sector, Redefine International will acquire a portfolio of properties worth R10 billion in the UK.
The acquisitions are two-fold for Redefine International, with a primary listing on the London Stock Exchange and a secondary listing on the JSE.
It entered into an agreement to acquire the portfolio of Aegon UK Property Fund for R9 billion which is made up of mostly retail and office properties. It further acquired Banbury Cross Retail Park for R1 billion.
Redefine International’s move, especially the size of the transaction, has surprised market watchers.
As Evan Robins, listed property manager for Old Mutual Investment Group’s MacroSolutions boutique puts it: “This is a very sizable deal and there is medium-term upside in rental levels.”
The transactions will bulk up the value of Redefine International’s property value by 50% to over R30 billion. The property counter, with a market capitalisation of R16.9 billion, is also factoring in an additional rental income of nearly R500 million.
CEO Mike Watters says the deal gives investors the opportunity to diversify in offshore markets, through Redefine.
“When we do deals we like to do chunky ones. Redefine International is a typical diversified fund like your Redefine Properties and Growthpoint Properties. And that is exactly what we want to create,” Watters says.
Redefine International owns retail, office, industrial and hotel properties in the UK and Germany. It has a bias towards retail properties and targets this for 60% of its portfolio, with the balance held in office, industrial and hotel properties.
The deal will boost Redefine International’s retail sector exposure to 54%, while office will be 22%, 15% for hotel and 9% for industrial.
In recent years, offshore funds have performed well relative to South Africa-focused funds. Grindrod Asset Management chief investment officer Ian Anderson says local investors have the desire to increase their offshore exposure. “This [deal] could potentially turn out to be a watershed transaction in terms of how the market perceives Redefine International.”
But building scale comes at a price.
Robins says although Redefine International’s deal was not cheap, it will improve liquidity to the extent that the company funds the acquisition with more equity. Watters say the deal will be part funded by new equity, as it looks to raise up to £80 million (R1.6 billion).
Anderson says if the deal is 50% or more equity funded and Redefine Properties elects to be diluted (which is unlikely), then “this would definitely be a game changer for Redefine International and would encourage substantially more institutional investor interest.”
Redefine Properties’ stake in Redefine International is more than 30%.
Other sources of funding will include its new bank facilities of £303 million (R6.3 billion) and $172 million netted from the sale of its stake in Australian-listed Cromwell.
“Our international shareholders would prefer us to focus on Europe and the UK – so that is what we are doing,” he says. Redefine International is also sitting on a cash pile of £60 million (R1.2 billion) from its capital raise earlier this year.