No knights in shining armour riding to rescue of smaller real estate groups
The CEO of SA’s second-largest property fund says the country’s big listed counters will struggle this year to make the investment case to buy out smaller real estate groups that have too much debt and growing vacancy levels.
Established property companies might do more harm than good by taking over less liquid, smaller South African funds, Andrew Konig, CEO of Redefine Properties said in an interview on Monday.
The JSE’s property sector appeared ready for consolidation this year after a listings boom in the mid-2010s added at least 20 new stocks to the bourse. These new companies were initially supported by investors who wanted to gain exposure to residential assets and specialised property types such as distribution warehousing, but a sharp decline in the strength of SA’s economy, which is barely growing, has dampened their prospects.
Hopes that established large property groups would bail them out appear dashed as these companies themselves have to deal with their own challenges and want to avoid adding risk to their balance sheets.
Economic growth is weak, with the Reserve Bank last week revising its growth forecast down to 1.2% for 2020 and 1.6% for 2021. Consumer spending has eased and landlords are finding it harder to raise rentals.
Konig said even though there are 46 property companies listed on the JSE, only seven of them comprise 65% of the exchange’s all property index. This meant 35% of the sector was spread across many relatively illiquid counters. While this appeared to make a case for consolidation, fund managers would not support mergers for the sake of them, he said.
The broader issue was that there was lack of quality among the new listings, and if they merged, most would not offer investors anything new, he said. Size was irrelevant and property companies could not get away with consolidating with other funds just to build scale.
“It is more about purpose and what compelling investment proposition you offer to your stakeholders; investable assets, investable management and optimal capital funding,” he said.
Redefine, which has been listed for nearly 20 years, initially invested its capital in SA but it has expanded into Poland, the UK and Australia at different times to diversify against weaknesses and risks at home.
The company, which has a portfolio of investments worth more than R95bn, said last year it had put R8bn worth of properties, or 8.4% of its asset base, up for sale. It wanted to bring its loan-to-value from 43.9% to below 40% and to raise more cash. Half of the R8bn is in the form of local assets and includes Redefine’s 51% interest in Respublica Student Living, one of the country’s biggest student accommodation providers.
But Konig said while the economic prospects for 2020 were bleak on the surface, there would be opportunities for property companies.
“We can’t just be pessimistic as South Africans and wait for economic catalysts. We need to look for opportunities which include recycling capital for deployment into assets which offer better long value appreciation prospects through development opportunities,” he said.