Small cap Tower Property Fund is now in a position to be discerning when it comes to acquisitions, as the fund looks to grow its retail sector exposure.
This is the view of CEO Marc Edwards, who says the growth ambitions of the fund are for more retail properties to be incorporated into its current R3.8 billion portfolio in the next 12 months.
Tower, the owner of De Ville Shopping Centre in the Western Cape, is working towards the retail sector making up 50% of its portfolio.
To get to its target, Edwards says the fund will be concluding acquisitions and disposing several office properties. The fund has made some headway, as when it listed on the JSE in 2013 its retail exposure was 30% and 70% for office. Its exposure to the retail sector is 33% for the 12 months to May 31, 2015.
“We have turned around our assets and we are moving to a phase where Tower can afford to be picky as to what it acquires,” says Edwards. This has paid off, as overall vacancies across its portfolio were 10% in November and have dropped to 4%. Tower also sees rental escalations across its portfolio of up to 8%.
While Tower still has a bias towards the office sector, now making up 55% of the fund, the headwinds experienced has spurred it to diversify. The sector has been under pressure, as office buildings have delivered humdrum returns and demand for office space in some areas has faltered.
“We have been under pressure in terms of our outlying B-grade office space, but we see our A-grade, well-located properties doing really well,” Edwards explains.
Older buildings with finishes close to modern standards as a result of refurbishments are referred to as B-grade. A-grade office space is generally not older than 15 years or undergone major renovations.
Tower’s focus on the retail sector does not mean that it is disinvesting from the office sector. “We still like offices,” says Edwards. But office properties need to well-located nodes.
Already, work has been put in with retail acquisitions. Tower acquired 14 office, retail and industrial properties to the value of R1 billion. Retail acquisitions include three Shoprite-anchored lower LSM shopping centres in Gauteng valued at R238 million.
“We are still a small R3.8 billion fund and we are focused on the convenient shopping centres. But the convenient shopping centres must also be well located,” Edwards explains.
Tower subsequently acquired the Evagold Shopping Centre in Evaton, Gauteng, and Link Hills Shopping Centre in KwaZulu-Natal for R110 million and R217 million respectively.
Edwards says offshore retail opportunities are plenty compared with South Africa. Tower has followed other property counters to the fertile ground offshore, as it recently announced its foray into Croatia by acquiring an office building for €23.7 million (R354 million) in the capital of Zagreb. Tower has announced a R1.5 billion acquisition pipeline in the region of mostly retail properties. It is also earmarking a R1.5 billion pipeline of five properties in South Africa.
Tower, with a market capitalisation of R2.3 billion, has been a value play for shareholders. For the period under review, it declared distributions of 86.8 cents per share. According to figures from Catalyst Fund Managers, Tower’s stock has delivered total returns of 4.9% for the first six months of the year.
Trading at R9.79, Tower’s stock is relatively cheap at a forward yield of 9.5% relative to the sector’s average of about 6%.