Capital flight: SA property companies invest billions more offshore

Some R68bn in 2018 alone. And international investors are also betting on other markets.
A Marks & Spencer department store in Warsaw, Poland. SA's listed property sector is heavily invested in the Central and Eastern Europe region. Photographer: Piotr Malecki/Bloomberg

South Africa’s property companies – both listed and private – are taking billions offshore in the face of poor economic growth locally, spiralling municipal rates and taxes, political and policy uncertainty, and issues such as construction site invasions.

Two statistics bear testimony to the surge in capital being invested offshore:

  • Research by New-York-based Real Capital Analytics indicates that SA-headquartered property investors “placed $4.9 billion (R68 billion) overseas in 2018”, and
  • Stanlib listed property funds head Keillen Ndlovu says SA’s listed property companies now have offshore exposure of 47% compared to “barely any exposure outside the country” just a decade ago.

In its study published in June, Real Capital states: “The gulf between investment activity in South Africa and overseas spending by South African investors has never been greater. These players invested about four times as much internationally than was spent in their home market during 2018.”

Source: Real Capital Analytics

It adds: “On the back of weaker-than-expected domestic economic growth in the first quarter of 2019, it’s likely that [SA] investors will continue to explore overseas exposure … International activity [by SA investors] overtook domestic investment in 2016 and since then the gap between overseas and domestic spending has widened significantly. Domestic acquisition volume fell more than 50% between 2017 and 2018 as listed entities pulled out and became net sellers.”

According to the report, of the $4.9 billion invested offshore in 2018, over 60% was invested in retail. The balance was split nearly equally between office and industrial property. “All the cross-border investment for the year took place in Europe, with 30% focused on Poland and 17% into the UK,” it notes.

Read: Investec Property Fund pumps a further R442m into the UK

“Listed entities were the top overseas buyers last year, with Redefine [Properties], Vukile and Nepi Rockcastle topping the list. The largest deal was the purchase of a Spanish retail asset portfolio by Vukile Property Fund for €489 million from Unibail-Rodamco. The acquisition of the Riverbank House office property in Central London [for £390 million million] was the biggest single asset deal – Oxygen Asset Management purchased the property on behalf of South Africa’s Zeno Capital,” adds the report.

Source: SBG Securities/Stanlib

Questioned by Moneyweb, Ndlovu says SA Property Index (Sapy) companies are heavily invested in Central and Eastern Europe (CEE), with almost 30% exposure. He says Stanlib’s research shows that while the CEE market makes up the bulk of the 47% offshore exposure of Sapy companies, other offshore markets include 7% in Western Europe (countries like Spain and Germany), 8% in Australia, 2% in the UK and 1% in the rest of Africa.

Ndlovu notes that the sector’s exposure to Western Europe increased after “Vukile did well by spotting an opportunity in Spain”. However, on the UK and rest of Africa fronts, there seems to be reduced interest due to Brexit and poor liquidity in the rest of Africa, respectively. He says barring Growthpoint/Investec’s Africa fund and Grit’s expansion drive in the rest of Africa, most other SA real estate investment trusts (Reits) such as Hyprop and Attacq were looking to exit.

Despite investment into the US in the past year by local mid-cap Reit Emira Property Fund, the exposure of SA’s listed property sector to the US is still marginal at below 1%.

Keillen Ndlovu, Stanlib’s head of listed property funds. Image: Supplied

Ndlovu believes SA’s listed property sector’s offshore exposure will top the 50% mark in the next year or two. “It’s hard to believe that the sector’s offshore exposure has grown from virtually 0% just over 10 years ago to some 47% today. But, for the first time in decades, listed property companies and funds are now delivering distribution or income growth below inflation.”

Read: Vukile’s Spanish bull run elevates distribution 7.5%

He adds: “Distribution growth has slowed down to the 2% to 3% levels. This has been largely driven by weak economic growth as well as oversupply of properties, particularly in the office and retail space. Without diversifying exposure to offshore markets, distribution growth will be a negative 3% to 4%.

“It basically reflects the current state of the South African economy.”

Garreth Elston, chief investment officer at Reitway Global, notes: “The first movers who started to look abroad during the global financial crisis period – such as Growthpoint with Goz [Growthpoint Properties Australia] and Resilient with Nepi – were very well rewarded for taking the risk of expanding into new markets during a turbulent economic time.”

He adds: “Due to the realities in the South African economy, property investors have almost been forced to go abroad to look for growth opportunities.”

Double whammy for SA

Commenting on the flight of listed property capital offshore, South African Property Owners Association CEO Neil Gopal says besides poor economic growth and policy uncertainty, a major factor is years of above-inflation hikes in municipal rates and taxes.

Read: Rising rate bills adds to commercial property sector woes 

“Rates and taxes have been the second fastest-growing operating cost item for property owners and investors since 2007. Adding to the sector’s woes are construction site invasions, in addition to poor service delivery, the skills deficit and building plan and rezoning delays at municipal level.

“We are not only seeing our members increasingly investing offshore, but international investors are also being put off from investing in SA, which is effectively a double whammy for our economy,” says Gopal.



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So glad I divested from SA. Really dont know what else to say.

This should set off huge alarm bells in government, but of course it won’t.

We’ll just put it together with further contraction in mining, manufacturing, and the brain drain and then conclude we need to step up the developmental state.

The ANC always seem to respond to the wrong stimulus

It is rather melodramatic to characterise property companies iinvesting overseas as ‘moving’, like when a person emigrates. A lesson one learns over and over in terems of investing is to diversify one’s portofolio. It makes sense therefore for property companies to ‘diversify’ their portfolio, and in so doing increase the chances for high returns for ther shareholders, raise the profile of hte compamy, get a dividend that is growing and likely to be a hedge against the ever oscillating rand rate. This diversitfication and geographic spread of assets is also a sound and proven strategy for a few of the companies, not only reality companies, and not every single one is a winner but it is an approach that is better than seating around and gnowing at one’s own fingers and scratching your head as Board and CEO.

I also believe that there is market correction taking place.

Fair comment. But there’s more to this than diversification, it’s everyone getting out of dodge.

Administered price increases are rendering the model unviable, and so is the low growth economy.

And now the same costs need to be recovered from a smaller base and up they go again.

Rinse and repeat until nobody is left standing.

This is what the ANC should be reacting to.

Diversification should be left to investors. Management teams are hired because they are experts in their fields and in the regions/countries where they have gained experience and competitive advantages. Management teams and companies should concentrate their expertise where they are experts, and return the cash to shareholders to use to diversify. Unfortunately SA laws make it difficult for investors to diversify, and this somewhat reduces the return hurdle for SA management teams. SA management teams often use the company free cash flow to increase the size of the company they manage and to invest elsewhere when SA or a specific’s industry’s prospects are poor. At those times cashflows are usually at its best, and the management teams are unwilling to give the cashflows to shareholders. Shareholders are conditioned/trained to spot structural changes and reallocate capital, not management teams in their specific industries.

There are hundreds of worthy property projects that could be developed were it not for the ANC’s BEE policy and its destruction of the SA economy through this policy, corruption and mismanagement.

The “on the job trainee” government here is quite clueless! All they know how to do is tax the few who work and pilfer the tax before helping the poor. Hold On !!

I don’t even want to own my own house in SA anymore.

To invest in property in SA you need your head read. Prices are only going one way. Soon it will be worthless.

Unfortunately SA property companies still have SA exposure. Who needs that when it is so easy to access the foreign property companies directly?

I have the same attitude as well. If I can’t sell my house in a given time, I will just leave it to rot. I will make sure that my immediate family doesn’t inherit this house. Not worth the effort.

SA investors incl government pension funds should have far more international exposure. I am less certain that the country should be doing it by way of local companies buying foreign title deeds, bricks and mortar. It would make much more sense (for investors) to buy foreign property ETF (diversified, liquid properties exposure managed by people with experience in each foreign market).

The only surprising thing about this is that it comes as a surprise to people.

If you do not have property rights why on earth would you buy a property in SA?

“Turkeys don’t vote for Christmas”. When he buys a property, the local property-owner pays for the “privilege” to be extorted by a socialist government. The redistributive municipal rates and taxes policy is expropriation without compensation. These turkeys are voting with their feet now. They are moving to jurisdictions where property rights are respected.

It’s only mentioned once in the article but it’s the elephant in the room: “oversupply of properties, particularly in the office and retail space”. Property developers have overshot the South Africa market. Have you seen how the many malls are losing tenants? There’s a huge oversupply of retail space. “To let” signs are popping up everywhere on office blocks too. The bust cycle is here.

Not just retail, the residential market is in exactly the same space. The confidence is gone.

Oversupply or a weak economy? GDP per capita declined the last 4 years. what do you expect?

Bees, in SA new malls opened at a rate 30 per year since 2010. Part of the furious expansion was prob driven by social grant spending in previous undeveloped commercial areas. But that expansion has probably reached maturity. As for the non-social grant driven developments, well talk about ignoring economic realities for years.

UK and EU property markets are not going anywhere fast. Refer INTU and CAPCO. And residential markets rely on millennials who cannot affront deposits.

And what about the multiplier effect from the lost spending on South African goods and services? It would seem that we could expect further weak or negative GDP numbers going forward.

End of comments.



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