Tower Property Fund: From Cape to Croatia

Small cap counter has big offshore plans.
Tower Property Fund looks to entrench itself in Croatia's retail sector.

Although small cap Tower Property Fund wasn’t initially on the radar of asset managers, the counter is proving to be an agile player in SA’s listed property sector.

Since listing in 2013, the Cape-based Tower has rapidly built scale as it doubled the value of its retail, office and industrial properties from R1.6 billion to R4 billion.

There’s no doubt that potential backers of the counter were waiting to see if the fund could deliver on its listing targets by offering sustainable and growing income to investors.

Also, would-be investors were wondering if the fund would become a takeover target in SA’s more than R500 billion property sector.

But Tower has over the years emerged as a counter which has offered attractive yields and property fundamentals on its assets for patient investors. In the past week, Tower’s share price jumped by 6% – and the 7.6% growth in dividend payouts to 45.2 cents per share announced on Thursday for the six months to November 30 2015 –  is likely to support the rally.

 

Tower Property Fund

 

Says Grindrod Asset Management chief investment officer Ian Anderson: “The numbers were exactly in line with our expectations and management’s previous guidance.”

The efforts of Tower, with a market capitalisation of R2.1 billion, continues to pique the interest of institutional shareholders – Allan Gray recently upped its stake to 15.24%. Other early backers include Grindrod and Stanlib. Tower’s stock is trading at a forward yield of 11.2%, compared to the sector’s 6%, positioning it as an attractive and affordable play.

Hello Croatia

Tower, owner of the trendy mixed-use Cape Quarter Precinct and the De Ville Shopping Centre, both situated in Cape Town, is joining the ranks of local property counters who are doing offshore deals.

In June last year, Tower identified Croatia as an ideal region for its growth ambitions, by acquiring part of an office tower building for €23.7 million (R420 million) in the capital of Zagreb. CEO Marc Edwards says Croatia has emerged from the 2007 global financial crisis, leaving a legacy of reduced property values and rentals, creating an “excellent” investment case.

Tower is already counting the benefits of its investment, thanks to the rand which has weakened by 27.28% against the euro over the past six months. Furthermore, with the depreciation of the currency, the value of its office tower acquisition increased by R41 million for the period under review. 

In January, Tower announced that it looked to acquire two properties occupied by Konzum, Croatia’s largest supermarket chain and two shopping centres for €66.4 million (R1.1 billion). The shopping centres included the 12 259 square metre Sub City Centre in Dubrovnik and the 9 362 square metre Meridijan 16 in Zagreb. This deal (upon transfer to Tower) will boost its property portfolio to R5.2 billion and Croatia will account for about 30% of its property value.

“Tower is always evolving and the Croatia deals have been the best for the fund. There are more deals in the pipeline, but it will depend on our ability to raise money. If we had a blank cheque, we would be doing more deals,” Edwards tells Moneyweb. Unlike SA, Croatia offers acquisition yields of about 9% on properties and cheaper borrowing costs (at around 4%).

The listed property manager of Old Mutual Investment Group’s MacroSolutions boutique Evan Robins, says although Tower’s investments into Croatia may prove to be good, it may not bode well with investors.

“Investors will be wary when management teams invest into areas where they have no obvious expertise or advantage, especially in lesser known markets such as Croatia.

“Tower is a small fund with acknowledged expertise in niches of the South African market, which made the move [to Croatia] more surprising. It is not the only smaller fund that is investing offshore, but it is looking in more adventurous geographies than most of its peers,” says Robins.

Over the last five years, SA’s worrying state of the economy has seen more property companies hedge their bets offshore. In fact, about 35% of the FTSE/JSE South African property index, a benchmark for the performance of the sector, is exposed to offshore earnings. The sector did not have offshore exposure up to ten years ago.

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