Income-chasing investors, who have supported rand-hedge property stocks in recent years, have been handsomely rewarded for their appetite in offshore markets.
Underscoring this is the fact that the share price of offshore property counters such as Romania-focused New Europe Property Investments (Nepi), UK-shopping mall owner Intu Properties, and rand hedge Rockcastle Global Real Estate have more than doubled over the past two years.
The stellar share performance of all three property stocks has led to some staggering returns being amassed for investors countering against the weakness of the rand – as a weaker rand means that offshore stocks will do better in rand terms.
The weakness of the local currency over the past two years against the dollar, pound, and euro – by 51%, 30% and 24% respectively at the time of writing – coupled with SA’s dismal economic growth and increased political risk has made offshore property stocks all the rage.
Rand hedge stocks were again the top performers last year with counters such as Nepi delivering total returns of 61.79% and 55.67% for London-focused Capital & Counties Properties, while listed property bellwethers Growthpoint Properties and Redefine Properties delivered negative total returns of 9.99% and 2.51% respectively, figures from Catalyst Fund Managers show.
However, more industry players are warning that the rand is currently oversold and that investors supporting offshore stocks must have a long-term view before making knee-jerk investment decisions of switching from SA-focused stocks to offshore ones.
Investec Australia Property Fund
Another offshore counter that is increasingly viewed as a value play is Investec Australia Property Fund (IAPF). The company’s stock delivered a 19.18% total return last year, not too shabby if compared with the 7.99% posted by SA’s listed property for the same period. And since listing in 2013, IAPF has delivered a total return of 67.8%.
Most industry players positively rate the company on three counts: hard currency earnings, solid operational performance, and management. On hard currency earnings, the counter is still delivering double-digit growth in dividend payouts of 29.3% to 9.17 cents per share for the year to March 31 2016. Even in Australian dollar terms, IAPF posted double-digit dividend growth of 12.1%.
CEO Graeme Katz says the company’s solid earnings are a testament to its strategy of acquiring quality real estate assets – backed by solid property fundamentals, proactive asset management and investing in Australia’s growth market. “IAPF remains a compelling investment opportunity in an Australian REIT (Real Estate Investment Trust) which is developed and stable. Australia’s resources boom has now shifted to production and net exports [of commodities] are now a strong contributor to economic growth,” Katz tells Moneyweb.
The fund, which is 18% held by investment bank Investec, has since been aggressive with its growth targets. Two years ago, IAPF owned a $129.9 million (R1.5 billion) worth property portfolio of eight logistics and warehouse and office properties and has over the years grown the portfolio to 19 properties valued at A$493 million (R5.6 billion). Ultimately, Katz is aiming for the property portfolio to be valued at A$1 billion (R11.2 billion) in the next two to three years.
IAPF’s strategy is to invest in high-quality buildings in metropolitan areas and near transportation nodes in towns like Victoria, New South Wales, Queensland and more. Its properties have a 100% occupancy rate and 56% of its leases are expiring after five years. It’s achieving rental escalations of 3.3% across its properties.
Katz believes the Australian market is attractive given that quality properties can be bought at yields exceeding 8% while debt funding costs are below 5% which “represents a significant yield spread than most developed markets.’’
For the year to March 31 2016, the company concluded acquisitions worth A$127 million (R1.4 billion) comprising of office and industrial properties. But global capital is chasing quality assets in Australia, which has made the market more competitive and prompted a shortage of quality assets, says Katz.
“We have not seen many opportunities in the last six months. In fact, the year-on-year supply of stock is down 8%. The larger REITs are not recycling assets. As we get bigger, we can acquire larger assets but it’s now becoming harder to buy trophy assets,” he adds.
With IAPF’s gearing being 29%, Katz is likely to clinch more yield-enhancing deals in the coming years, as the company has the capacity for its gearing to be between 35% to 40%. “At the company’s target gearing ratio of up to 40%, this gives us up to A$92.1 million in debt capacity to continue to aggressively pursue attractive acquisition opportunities,” he says.
But Katz is quick to caution: “We are not going to grow or conclude acquisitions for the sake of growing. We want quality assets with good tenants.”
Says Evan Robins, portfolio manager at Old Mutual Investment Group’s MacroSolutions boutique: “IAPF produced good results with NAV up [5.5%] well above inflation [1.5% for 2015 according to the International Monetary Fund] and the benefit of gearing coming through in distribution growth.”