EMIRA PROPERTY FUND: Dipping toes into the US
Emira Property Fund has become the first SA-listed property group to invest in the US.
The company has shelled out R290m for two grocery-anchored convenience shopping centres — one in Ohio, the other in Texas.
Until now, no SA-listed property company has made investments in the US.
CEO Geoff Jennett says the figure, about 2% of the company’s total assets, is just an initial investment, and Emira will consider making further investments in the US.
The attraction for Emira is twofold: diversification amid low business confidence and a local economic slowdown, as well as the advantage of cheap debt in the US.
"We can comfortably fund this from our own balance sheet and we can take advantage of access to relatively cheap, in-country, long-term debt finance," says Jennett.
Other SA property funds say the US is too large and competitive to risk pension and investment money. The time-zone difference has also long been a hurdle for SA companies.
Vukile Property Fund and Growthpoint Properties have considered investing in the US. But with 50 states and competition from large European and Asian real estate companies, the move has proved too daunting.
Many local property counters have opted instead for Central and Eastern Europe (CEE).
Poland, the largest economy in this region, has become a popular investment destination. Recently FTSE Russell, a British provider of stock market indices and associated data services, upgraded Poland’s market status from emerging to developed. The CEE region is enjoying stable economic growth, supported by strengthening consumer demand. Around 45% of SA’s JSE-listed property market is offshore and at least 20% of it is in CEE.
Stanlib’s head of listed property funds, Keillen Ndlovu, says various local funds have been looking at the US for investing. But they’ve been faced with various challenges, mainly relating to how property taxes work compared to SA. As part of its US strategy, Emira will co-invest with Rainier Companies, an investment and real estate business in Dallas, Texas, headed by JKenneth Dunn, its co-founder and principal. Rainier has more than US $1.5bn of property assets under management.
Emira holds its investments through a US-based subsidiary managed by in-country fund manager Continuum Investments LLC, which is headed by CEO Rick Makin, a US-based, SA-born entrepreneur. Jennett says Emira is confident its co-investment strategy lessens the risk of entry.
"Our partners, Rainier, have a wealth of experience and local market insight, as well as an existing investor base. As the major equity partners, they are putting up their own money, and we are excited to invest alongside them."
Rainier has identified certain states in the US, including some of the major southern and central states, which have meaningful GDP growth rates, as the target territories for its investments over the next five to 10 years.
Mvula Seroto, an investment analyst at Catalyst Fund Managers, says Emira used a complex tax structure for its first US deal.
"Unfortunately tax is a complex subject and the structuring of Emira’s US transaction was no different. Given the corporate structure used, Emira’s effective overall tax rate is reduced to under 5%, using a combination of wear and tear allowances and claiming relief under the relevant double tax agreement," he says.
Emira is already internationally diversified, with 6% of its income derived from its investment in Australian Securities Exchange-listed Growthpoint Properties Australia. Its US investment strategy will result in this quickly growing to an overall 8% with potential to expand to at least 10%, says Jennett.
He says Emira has looked for more opportunities in Australia and in Western Europe.
"We wanted to access the First World, which is less risky than parts of Eastern Europe, Africa, South America and parts of Asia," says Jennett. "The US is the biggest First-World country and its real estate market is the largest and most developed. The US enjoyed 3% GDP growth in the past two quarters. So it held up well and then we could look state by state, and get the micro right because the macro was right."
There are three Emira employees now working in the US and Jennett visits the country regularly to help build the platform.
He says that by June 2018, 4% of Emira’s assets will be in the US and 6% will be in Australia through Growthpoint Australia.
"We will focus on southern and southeastern US states for the next few years," he says.
Where opportunities meet predefined investment criteria, Emira and Rainier will partner on a 49% to 51% equity basis, respectively, at the individual property level.
Grocery-anchored convenience shopping centres, between 5,000m² and 40,000m² in size, have been identified as its asset class of choice.