Marked shift offshore since Zuma wielded axe
There has been a big shift of investment to offshore property stocks since March, which can be directly linked to the political uncertainty created by President Jacob Zuma’s cabinet reshuffle, in which respected finance minister Pravin Gordhan was axed.
Ian Anderson, chief investment officer at Bridge Fund Managers, said on Thursday that up until March, investors were still looking to buy into South African funds, as offshore real estate had still been "underperforming relative to local stocks".
"That all changed in the second and third quarters, with investors significantly adding to their offshore exposure. That coincided with a significant decline in business confidence in SA and a fairly significant downturn in local property fundamentals following the Cabinet reshuffle," said Anderson.
This is borne out by the latest Anchor Stockbrokers newsletter, which shows that three of the four top-performing listed property stocks in terms of share price movement year to date have been rand hedges.
According to the newsletter, offshore-focused Greenbay Properties, Sirius Real Estate and MAS Real Estate were among the top four performers with share price growth of 45.9%, 38.7% and 23.2%, respectively, since January 3.
Anderson said he was not surprised that offshore stocks dominated the list of top performing shares, saying that along with the fall in business confidence, local property companies were finding the local environment more challenging.
He said landlords were finding it "much more difficult in their interactions with tenants" and were now having to offer bigger incentives to get clients to stay or relocate to their properties. These incentives included rent-free periods, as well as offering to cover more of the installation costs of the tenant.
But Anderson said the deteriorating political climate and weaker economic backdrop aside, there was still "significant value in many of the domestically focused companies".
"The initial yield you are getting on these businesses is significantly higher than the government bond yield. There is a significant margin of safety in local property," he said.
The South African listed property sector remains one of the most active on the JSE when it comes to capital raisings, but unsurprisingly most of the money raised is funding offshore acquisitions.
Keillen Ndlovu, head of listed property funds at Stanlib, said 2017 had turned out to be another strong year in terms of equity raised, with R27.6bn year to date compared with R32bn for the whole of 2016.
"Most of the transactions are oversubscribed in two to three hours post the announcement [of an accelerated bookbuild]. There has been a lot of cash chasing property, but mostly offshore focused companies or Reits [real estate investment trusts]," said Ndlovu.
He said this trend was likely to continue and a few more offshore transactions were possible in the next few months.
Ndlovu said the actual underlying exposure of the South African listed property sector had changed drastically in the past 10 years. A decade ago, apart from South African assets and some property in the UK, the local listed sector had no exposure to any other markets.
The local listed property sector now gives exposure to more than 25 countries.
"The UK exposure has increased, largely driven by the listing of Hammerson in September  on the JSE.
"The sector has seen a dramatic increase in Eastern European exposure."