Some pearls in South Africa’s listed property sector

Those investors which look carefully in 2016 when picking their stocks may be rewarded but the overall sector is under pressure in South Africa

Those investors which look carefully in 2016 when picking their stocks may be rewarded but the overall sector is under pressure in South Africa, reports Ortneil Kutama, Africa Property News.com Media Director.

Hyprop Investments could perform strongly. The Mall of Rosebank is expected to boost the company as are its African operations. Hyprop upgraded the mall in 2014 and 2015 and it has proven to be highly successful. Hyprop has invested in shopping centres in Nigeria, Ghana and Zambia through partnerships.

Fortress Income Fund merged with Capital Property Fund last year to create a mega fund worth over R50bn. Fortress B shares have been coining it since its listing in 2009, as it has been the best performing property stock on the exchange for two years running. This company could still bring market beating returns given how it will dominate industrial listed property.

More offshore funds are expected to list on the JSE. Fewer South African funds are likely to join as they are struggling with a weak economy and a shoddy rand. There may be more consolidation of local funds as opposed to new funds joining the exchange.

Takeover targets could include Emira Property Fund, an owner of mostly office and retail properties, and Tower Property Fund, a Cape-based company that listed in July 2013 and has made many opportunistic acquisitions since. The fund’s portfolio is also spread across SA, and has exposure to Croatia in eastern Europe.

Accelerate Property Fund could also do well as its Fourways Mall development grows. The suburb of Fourways has required a large degree of improvement and people living in the area have desired a larger mall. 

Resilient Property Income Fund had a good 2015 and could repeat its impressive performance this year. Resilient, under the leadership of Des de Beer, has grown to be a company true to its name. It has withstood economic weakness and competition from other funds.

Resilient own many shopping malls in rural areas and small towns. Resilient has over the past few months been boosted by various accretive acquisitions of lower LSM (Living Standards Measure) regional malls and strong returns from its property funds holdings, many of which are abroad. These include holdings in Rockcastle Real Estate and New Europe Property Investments, among others.

In terms of offshore funds already listed on the JSE that could perform well, there are Sirius Real Estate, which was strong company in 2015 and has grown to be the biggest JSE Alternate Exchange company and also Schroder, a recent listing. Sirius owns and manages business parks in Germany. These business parks include flexible office space which is attractive for small and medium enterprises, which are a large driver of the German economy and also storage assets. Over the past five years, under a turnaround management team, Sirius has gone from owning large office buildings to a portfolio of properties suitable for more businesses. At R6.7bn, it needs to migrate from the Alternate Exchange to the main board of the JSE.

Schroder Real Estate is also based in Europe. Schroder, which was established by multinational property group Schroder Real Estate, offers local investors exposure to European markets, which are expected to do well this year.

Analysts say Schroder will be a welcome addition to the JSE.

"I see space for them, as Schroder is a very competent asset management company with an experienced management team and board based in the geographical area in which they invest. This company has a solid history and franchise in their home market and have an advantage over non-European specialists operating in their core markets," says Alternative Real Estate Capital Management’s Garreth Elston.

In terms of stocks which could surprise on the upside but are quite risky investments, there is Delta Property Fund and Mara Delta. Delta is a government tenant focussed real estate investment trust which has struggled to gain above market returns from some of its assets. Mara Delta is the African arm of Delta. Mara was created through a merger between Delta Africa and Mara Diversified Holdings. It controls more than R6.5bn worth of assets in Africa, making it the largest pan African property fund on the continent.

On its own, Delta Africa struggled to make deals quickly enough. Mara will boost the company and should boost its share performance in 2016. Mara Delta’s development component has been estimated at $500m to be rolled out over five to 10 years, CEO Bronwyn Corbett says.

Stanlib’s head of listed property funds, Keillen Ndlovu, has said that the Delta Africa and Mara partnership is a strong move by both parties.

He said Mara Delta had more critical mass as compared to funds doing something on their own and having relatively small portfolios.

With respect to South Africa’s listed property giants including Growthpoint Properties and Redefine Properties, investors need to be cautious. These funds are struggling to find acquisition opportunities in South Africa. They are looking at offshore options with Growthpoint likely to acquire more assets in Australia and Redefine with an eye on Europe. New deals may occur in 2016 but the effects on capital appreciation and distribution growth will only filter down in 2017 and 2018.

However, Growthpoint and Redefine will improve the quality of their assets with various upgrades. They may also sell off unwanted assets that are too small or too low quality for their portfolios.

Finally, Arrowhead Properties could impress yet again. This diversified property group has provided investors with consistent returns for a few years and is run by the skilled team of Gerald Leissner, Mark Kaplan and Imraan Suleman, concludes Kutama.