Diversified property group Arrowhead Properties has ambitions to make sizable acquisitions in 2017.
The group has been a successful consolidator on the JSE for a number of years, but found it difficult to make plays for smaller funds in 2016. It has grown to a market capitalisation of about R8.8bn.
However, listed property companies, especially illiquid ones with market capitalisation of between R1bn and R5bn, could be in Arrowhead’s sights.
Targets could be Safari Investments — a Pretoria-based owner of shopping centres in lower-income areas — and diversified property group Dipula Income Fund.
Having listed in 2011 with R1.4bn worth of properties, Arrowhead now has an investment portfolio valued at R11.5bn, made up of R1.5bn in other real estate investment trusts and R10bn in property.
In 2016, it struggled to make sizable acquisitions or take over other funds. In July, Arrowhead expressed an interest in taking over Emira Property Fund. However, Emira rejected the offer of 1.67 shares for one.
The group nonetheless increased its core property portfolio 6.1% during the financial year to September.
Arrowhead’s management said recently it would look for more opportunities in 2017.
"I think consolidation opportunities could arise in the listed property sector next year. Our strategy has been to grow, and often through strong acquisitions. We believe that next year we will be more successful with some of our takeover attempts than we were in 2016," said chief operating officer Mark Kaplan.
"Arrowhead is well diversified with properties across the country and sectors, including residential. It is a defensive investment, especially in this challenging environment."
At the end of September, the group’s share of residential-focused Indluplace Properties was at 60.1%. It owned 11.5% of Dipula Income Fund and 19% of Rebosis Property Fund.
Also at the end of the reporting period, Arrowhead owned 154 buildings. Of these, 47% were retail properties, 41% were offices and 12% were industrial by value.
In October, Arrowhead disposed of its subsidiary, Cumulative Properties, to Gemgrow Properties for R1.89bn. On conclusion of this transaction, Arrowhead would own 54 properties valued at R5.7bn with a vacancy level of less than 6%.
Kaplan has said that by listing Gemgrow, Arrowhead would become an easier fund to manage in meeting investor’s needs.
By buying into Arrowhead, investors would know they were gaining exposure to a "high-quality, diverse fund that had mostly long-term leases as opposed to a real estate investment trust with more than 100 properties of varying quality".
Maurice Shapiro of Ma’alot Investments said Arrowhead might try to buy portfolios from private property companies in the coming year.
Some multinationals and companies which own property but see real estate as a secondary or tertiary business might sell some property to grow cash reserves. They would then lease back the assets, with the property group that bought them managing them.
Arrowhead’s management has said the group wanted to focus on owning and managing real estate in SA but they could surprise the market by taking over a South African trust with offshore exposure.