JOHANNESBURG – The turbulent domestic market has prompted South African companies to look beyond the market for value in their investments.
The property sector has also joined the search for more offshore investments which provide greater diversification, exposure to a larger market and attractive valuations.
This trend is echoed more by South Africa’s largest listed JSE-listed property company, Growthpoint Properties which is finding the Australian market more appetising.
Growthpoint, best known for its portfolio of quality assets which include Cape Town’s V&A Waterfront, is seeing limited assets in the local market.
Despite the subdued view on the local market, Growthpoint has made substantial acquisitions locally to the tune of R15 billion in the previous financial year, bringing the value of its 436 assets to R76.2 billion.
The company’s CEO Norbert Sasse in an interview with Moneyweb describes acquisitions as a “once in a lifetime opportunity.”
On the surface, the activity on the ground characterised by mergers and acquisitions might spell a robust market. But the South African property market remains challenging, as Sesfikile Capital director Mohamed Kalla notes, explaining that the macroeconomic environment does not look good.
“We’re not seeing sufficient economic growth to keep pace with supply, particularly in the office sector. There are less opportunities [in the property market] now than two to three years ago,” Kalla explains.
Also, the heated competition for quality assets, the race to secure long-term leases and an interest rate rising cycle has seen companies including offshore investments as part of their strategy.
More specifically for Growthpoint is the Australian market, which in the cost of debt and yields on property, trumps South Africa.
In the last year, Growthpoint’s Australian acquisitions story has been similar to South Africa’s. The company acquired office space in New South Wales and a string of industrial properties in Victoria to the tune of R1.9 billion.
Growthpoint’s 64% holding in Growthpoint Properties Australia (GOZ), of 51 properties in the office and industrial sector, has assets valued at R20.9 billion.
Growthpoint is not the only property counter with its eyes set firm in Australia. Redefine Properties recently increased its direct holding in Australian-listed Cromwell Property Group.
Low interest rates and inflation in Australia make property yields look more attractive, making a strong investment case in the country.
Australia’s interest rates are still at a record low 2.5% while South Africa has so far seen a 75 basis points rise in interest rates.
Investment analyst at Meago Asset Management Tsana Ramatswi says inflationary pressures have eased, but the higher than expected trade deficit might push the Reserve Bank to hike rates again.
“This will further squeeze the margins for companies using floating South African debt financing,” she says.
Sasse says there is better value in the Australian market, on the basis that Growthpoint can borrow money for a five-year period for 5% of interest and get yields on investment property of “around 7%.”
“In the South African market the five-year money today is costing you about 9%, there is little decent stuff you can buy at 9%. If you want the good stuff you have to pitch below 9%,” he says.
Birds of a feather
Both countries have similar property sector trends, specifically in vacancies. Sasse says Australia has office sector vacancies in the region of 7% to 8%. Office vacancies in Growthpoint’s Australia portfolio are below 2%.
Kalla says the Australian office sector is tough with high incentives being paid to retain or secure new tenants.
He adds: “They [Growthpoint] should rather continue to focus on lower risk assets with long-term leases such as the assets they own in the industrial sector.”
In South Africa Growthpoint’s office vacancies increased to 8% from 7.8. “The trend is for vacancies going up. The first is that there is no real economic growth. Economic growth will naturally translate into demand for office,” Sasse says.
Stanlib head of listed property funds Keillen Ndlovu says Growthpoint has built a good track record in Australia. “The portfolio has worked out well and so has the Australian currency versus the rand. Things are looking good in Australia,” says Ndlovu.
More recently GOZ has been included in the S&P/ASX 300 index on the Australian Stock Exchange, which could result in more liquidity and a diverse shareholder base.
“The stock is trading at a forward yield of about 8% in Australian dollars. This is higher than the South African listed property index at about 7.3%,” says Ndlovu.