Undeterred by uncertainty around Brexit, South African mid-cap real estate investment trust (Reit) Investec Property Fund (IPF) has tripled its stake in UK-based Investec Argo Property Fund to almost R650 million.
IPF announced in a statement late on Monday that it had acquired an additional 23% interest in the UK fund for £25 million (around R442 million), taking its shareholding to 33%.
The JSE-listed Reit, which has more than R21 billion in assets under management, says the acquisition forms part of its capital recycling strategy and would be part-funded through the proceeds received from the “partial sell down” of its holding in the Investec Australia Property Fund.
Despite the sell down in Australia, IPF’s offshore exposure has increased to 17% on the back of the UK acquisition.
“This [the deal] allows us to realise the opportunity to scale up our investment in an established international platform that has delivered a compelling IRR [internal rate of return] of 15.8% since inception, despite local [UK] market volatility,” says IPF joint CEO Andrew Wooler.
IPF states that, given the intended funding structure, the investment is also expected to be “earnings accretive” in the short term. The UK fund is made up of retail and industrial sector properties.
“The acquisition is expected to generate a post-withholding tax initial yield of circa 5.5% in British pounds and reflects a discount to net asset value of 14%, providing an attractive enhancement to the IPF’s entry point into the UK,” notes Wooler.
Increased UK exposure
Garreth Elston, portfolio manager at Reitway Global, says the ongoing uncertainty around Brexit continues to be a drag on property performance in the UK. “The retail sector remains among the hardest hit. We are wary of secondary retail and industrial assets in the United Kingdom, which are the predominant assets in the Investec Argo portfolio.”
He adds: “Our preferred sectors in the UK are primarily office, logistics and self-storage. However, considering IPF’s current stake in the business, and its knowledge about the portfolio, it makes more sense for Investec to grow its stake in a familiar portfolio rather than speculatively buying assets that are unknown to the company.”
According to IPF, Investec Argo Property Fund is underpinned by sound property fundamentals and a quality tenant base, including several long-dated Sainsbury’s store leases. The UK property portfolio has a weighted average lease expiry (WALE) of 11 years and vacancy of 2.2% (excluding development vacancy). The UK fund is targeting annualised total returns of approximately 10%.
Wooler notes: “This acquisition further enhances our balance sheet diversification, increasing IPF’s total offshore exposure to approximately 17% and strengthening the optionality of our portfolio in line with the intent to grow offshore contributions. This, in addition to our high quality South African asset base, positions the IPF optimally to deliver on our objective to optimise capital and income returns over time for shareholders.”
Anchor Stockbrokers’ head of research and property, Craig Smith, says IPF’s UK acquisition is “very defensive” in light of it being at “sizeable discount to NAV [net asset value]” and having a long WALE of 11 years.
“The UK fund is exposed to industrial and retail. Retail is broadly under pressure in the UK, but that doesn’t mean there aren’t opportunities. IPF has a good track record and has delivered good returns,” he notes.