REAL ESTATE PORTFOLIOS
Why it is a bad time for property listing hopefuls
It is unlikely that the JSE’s real estate sector will support the listing of large private portfolios unless these offer investors something new or include property types that are in vogue — such as distribution centres and rural retail, which offer growth in a stagnant economy.
There were market rumours that telecommunications group Telkom and some large pension money holders such as Old Mutual and Pareto may come to market in 2018, but analysts say they may be better placed to pursue large listings when fundamentals have improved for listed property.
The sector is trading at a large discount to net asset value and has been highly volatile so far in 2018.
A weakening rand has also prompted some investors to put more of their money into offshore property groups.
"Activity levels are at multi-year lows. We’ve seen a lack of transactions by listed funds and few capital raises in 2018 so far. It would be difficult for a fund to list in this market right now while the sector overall trades at a large discount to net asset value. They’d really need to offer something unique," says chief investment office at Bridge Fund Managers Ian Anderson.
Those who wanted to list funds had to compete with numerous offshore groups for limited amounts of money. "Fund managers have a lot of choice, which includes offshore companies. So if you try to bring something to market it has to be special. It could include high-quality distribution centres or some kind of well-managed retail. We’ve seen Equites raise close to R1bn in capital partly because Equites owns very good distribution assets here in SA and abroad. Hyprop, which owns some of the best shopping centres in SA, raised close to R800m in May because its cost of equity was not too high and the company is still well backed by loyal investors," he says.
A few listings
Craig Smith of Anchor Stockbrokers says there may still be a few listings in 2018 but these would be ones prepared a number of months or even years ago. The teams behind these listings would either be confident of raising the funds they wanted or would not be looking to raise significant capital. The only property listing to be announced in 2018 so far will see developer McCormick list a R5.5bn rural retail portfolio under Exemplar Reit.
Smith says McCormick has built a strong reputation over three decades of developing rural shopping centres and fund managers will recognise the team leading Exemplar are not fly-by-nights.
"McCormick is a specialised listing. Overall though, I think right now with fund managers having limited funds available, would generally choose liquidity over specialisation and would wait for a large liquid fund to list. The likes of Old Mutual and Pareto, which have exposure to large urban retail, could be large and liquid on the exchange, but I think they’ll wait for better conditions before they pursue listings."
Many fund managers are still taking their money offshore and investing in large liquid funds there.
Smith says investors have also noted that the South African listed property sector has performed badly in 2018 so far. This was partly because people sold down shares of the Resilient group of companies.
Reports were released a few months ago that criticised Resilient, Nepi Rockcastle, Fortress and Greenbay, suggesting their share prices were artificially high. Directors were accused of selling each other shares to inflate the price.
An independent investigation set up by Resilient later found the companies were not guilty of any wrongdoing.
But the JSE and Financial Sector Conduct Authority are still investigating.
As a result, fund managers are wary of investing in such a volatile sector, says Garreth Elston, a portfolio manager at Reitway Global. "It’s going to be a tough year for property. We need to see what the JSE and other parties find if anything."
Peter Clark, a portfolio manager at Investec Asset Management, says the market will not see many new listings until the average cost of capital falls in the sector.