Although the investment community took a while to warm up to Tower Property Fund when it came to the market in 2013, management has since been active on the deal-making front.
The fund, which initially listed a portfolio worth R1.6 billion of retail and office properties, has over the years grown its assets to R4.1 billion.
Tower – with a market capitalisation of R2.1 billion – is on a drive to create value for would-be investors and institutional investors, this time joining the ranks of local property counters concluding offshore investments.
It has identified Croatia as an ideal region for its growth ambitions, as the company acquired a portion of a VMD KVART office building for €23.7 million (R320.7 million) in the capital of Zagreb.
The acquisition has been concluded through Tower’s 100% held subsidiary, Tower Europe, a newly-created company registered in Croatia.
At an acquisition yield of 8.5%, Tower Europe will hold exclusive ownership of 15 of the building’s 26 floors.
The 50-odd counters listed on the JSE’s more than R500 billion real estate sector have been on the prowl for new growth avenues in recent years. As the head of Stanlib’s listed property funds Keillen Ndlovu puts it: “We continue to see an increasing trend of South African listed property companies diversifying their portfolios outside South Africa, mainly to the UK and Europe.”
This is as the country’s tepid economic growth and the potential rise of interest rates has made trading conditions difficult.
The appeal of low-interest rates in the region beyond the continent, coupled with the potential of lucrative returns on property investments, has seen companies prioritise offshore investments.
Tower CEO Marc Edwards said the fund has been investigating offshore opportunities since last year June and the search led it to forge relationships in Croatia. As part of its offshore venture, Tower has partnered with Croatian specialist developer VMD Grupa, as it seeks to grow its footprint in the region. VMD Grupa has also acquired a 20% stake in Tower Europe.
Edwards said opportunities in Croatia are plentiful, as the country is still recovering from the onslaught of the 2008 global economic meltdown, which sent property rentals crashing to a 15-year low. This trend, he added, represents significant buying opportunities of office and retail assets. “Because Croatia is small in terms of population and the assets we are being offered are quality, we have the power to be dominant in the country.”
He added that Tower’s balance sheet is strong enough to support acquisitions, despite dealing in foreign currency. To fund its acquisition, it will use proceeds from its R500 million capital raise combined with debt funding.
Edwards emphasised that South Africa is still the core focus for the fund. Locally this year, Tower has made several office, industrial and retail acquisitions close to R1 billion.
Some industry players are still on the fence about Tower’s value proposition, given that it has a bias towards office properties. Because of this, director at Meago Asset Managers Thabo Ramushu said: “we currently do not like [the company] and recovery on this sector is probably 18 to 24 months away.”
The office sector has been under pressure because of pressures in the economy, which has seen it deliver humdrum returns.
According to IPD in its annual South African property index, which measured the 2014 total return of directly held property investments, the office sector was the laggard. It produced total returns of 12.1% versus 14.1% in industrial and 13.3% in retail.
Evan Robins, listed property manager for Old Mutual Investment Group’s MacroSolutions boutique said: “I think the market will need to be convinced that South Africa’s property funds can buy well in markets in which they are not experts.”
Despite its office exposure and offshore investment concerns, Tower is still looking relatively cheap at a forward yield of 10.35% versus the sector’s average 6.8%. This means its share price is trading at a discount to the sector.
Over the past year, Tower’s share price has risen by 11.1%, trading at a narrow range of R8.35 to R9.60 (as of Thursday’s close).