Property funds face risk if they choose to delist
Struggling property funds wanting to delist to preserve cash might need to think again because they will need to be guaranteed the support of SA’s private investment community, which is unlikely, say stockbrokers and fund managers.
Property funds focus on paying income to investors but weak operating conditions have led to income payouts being cut across the sector. By delisting, funds would not have to pay regular dividends, but these companies will still need access to capital from private sources.
Craig Smith, head of research and property at Anchor Stockbrokers, said most institutional fund managers focus their capital on listed stocks.
“The challenge will be that most fund managers have specific mandates to invest in listed property companies. Therefore in order for this to happen one would need formation of private capital targeting the unlisted property sector and that is willing to migrate into a theoretically less liquid investment,” Smith said.
Anchor Stockbrokers, 49% owned by JSE-listed Anchor Capital, provides equity brokerage services and property research to institutional clients.
Keillen Ndlovu, head of listed property funds at Stanlib, said it was a challenge that the JSE’s real estate sector was trading at a discount and it was cheaper to buy stocks there than to acquire buildings directly. This made the unlisted market appear more expensive and less attractive.
Ndlovu said, however, the property market, both listed and unlisted, was under pressure.
“It’s also difficult to raise funding for acquisitions at the moment be it through debt or through equity through book-builds. Market conditions are really poor,” he said.
Nonetheless, weak economic growth prospects and low consumer demand could prompt certain funds to try to delist, said listed property manager at Old Mutual Investment’s MacroSolutions boutique, Evan Robins.
“For smaller companies with a large shareholder trading at a sizeable discount, it is most possible. Ingenuity Properties was one and it delisted in 2019. If a company cannot access capital on the market or from existing shareholders and if it cannot benefit from the tax advantages of being a Reit (real estate investment trust), a listing makes much less sense and is an added cost,” he said.
Only four years ago property companies dominated new listings on the JSE. From 2011 to 2016, 40 real-estate companies were listed on the main board of the JSE as well as the alternate exchange, largely because they wanted to benefit from the tax breaks of the recently launched Reit capital structure.
SA Reits pay at least 75% their income as dividends, which are taxed in the hands of shareholders and not at net profit level. These stocks are popular with pension funds as they are designed to provide regular income payouts.
Reit dispensation was implemented in late 2013 and the first half of 2014. Nine property companies listed in 2014, six of which were Reits. Nine more listed in 2015, all of which were Reits. Five of the seven property companies which listed in 2016 were Reits.
The companies promised to reward investors with inflation-beating dividend growth.
Reits were able to raise billions of rand in capital at listing before even owning asset portfolios. Development funds were supported by banks, saying listings would enable them to construct new shopping centres, offices and housing in SA’s commercial hubs.
But fund managers say that in the aftermath of the listings boom, the JSE’s property sector is struggling to grow its dividends at all, never mind beating money market investments.