Listed property could be poised for consolidation
Consolidation is expected in the listed property sector as larger players look for smaller funds with specialised assets and room to grow
Some listed property analysts and executives expect to see increasing consolidation in the sector in 2019 as funds trade at large discounts to net asset value and high-income yields.
The SA Listed Property Index is offering a yield of about 9%, which makes it relatively cheap compared to previous years. Towards the end of 2017 the sector had a yield of about 6.4%. Property yields have an inverse relation to price. This suggests that when yields are high, prices are relatively cheap.
But it is not clear where the consolidation will take place, with market commentators expecting SA’s large property funds to try to buy exposure to small specialised groups.
Arrowhead Properties CEO Mark Kaplan said consolidation had to happen in the listed property sector because investors would prefer to invest in larger liquid property companies that had scale and expertise to perform in a challenging local environment.
Arrowhead, which listed in December 2011, had been one of the most acquisitive property funds on the JSE for a number of years but this came to halt in 2018 when listed property stocks fell out of favour.
“I think the listed property sector really needs consolidation. There is a group of smaller specialised funds which are quite illiquid and tightly held which have value that could be unlocked by an acquirer.
“We look at numerous opportunities at Arrowhead including portfolios owned by private companies. In the current economy many of these companies have become more open-minded to deals and I think sellers and buyers are closer in terms of their expectations,” Kaplan said.
At the beginning of 2018 there was a sell-off in the shares of the Resilient group of companies after various reports criticised the companies suggesting they inflated profits through inter-related party deals and that the companies’ share prices had been manipulated. This and weak economic conditions placed pressure on the sector, which lost 25.26% in 2018.
One way in which Arrowhead could be involved in consolidation in 2019 is if it sells its 17.9% stake in shopping centre landlord Rebosis Property Fund.
The investment has disappointed since Arrowhead began buying Rebosis shares in 2016. Rebosis has underperformed recently and in 2018 it was the worst stock in the sector with a total return of -68% after it announced large dividend cuts. Kaplan said Arrowhead was “trying to find a solution” with respect to the investment.
Ahmed Motara, an analyst at Stanlib, said he thought that one event involving consolidation could lead to others. “Once a fund makes a play for another it will be a signal that there is value in the market and other events will follow,” he said.
The most likely consolidation might be between large diversified funds and small specialised funds which had room to grow, according to Garreth Elston, a portfolio manager at Reitway Global.
“The only acquisitions that make sense to me would be current large diversified Reits buying specialist Reits that are still growing. In my opinion these could include companies such as (industrial focused) Equites and (storage group) Stor-age, but it is highly unlikely that these companies would be willing to be acquired,” said Elston.
But Ian Anderson, chief investment officer at Bridge Fund Managers said consolidation had slowed down globally and that investors in SA were looking for income returns while capital growth was weak.
“Under normal circumstances, large discounts to NAV usually signal a period of consolidation but this time around it does seem to be different. Investors don’t believe the current valuations or don’t see much scope for values to rise in the medium-term. Income yields are likely to play a much larger role in shaping returns in the years ahead,” he said.