Growthpoint’s bid to buy into UK mall owner
Investors are starting to cash in on British property bargains, with Growthpoint leading the way
Six months ago, few property punters were prepared to take a gamble on UK-focused real estate investment trusts (Reits).
Not even die-hard value-chasers seemed to find UK property stocks a buying proposition, despite many counters trading at 10-year lows and discounts to NAV north of 60%.
However, it appears that investors have finally had a change of heart, no doubt in the run-up to the Brexit deadline, now extended to January 31 2020.
Flows of money to selected UK property stocks have increased significantly over the past few weeks, with share prices of a number of dual-listed (JSE and London Stock Exchange, or LSE) counters up between 50% and 70% since August.
These include mall owners Hammerson and Capital & Regional (CRP), Covent Garden-owner Capital & Counties (Capco) and Christo Wiese-backed Tradehold.
Even so, most UK Reits have a long way to go to get back to their highs of 2016. Midway through that year, Britain voted to leave the EU.
For instance, Hammerson, the JSE’s largest UK-focused counter, was at about R57 earlier this week — way below the R115 at which it listed on the JSE in September 2016.
Similarly, Capco’s R49 lags behind its 2016 highs of R80, and so does that of CRP — R5 now, against R14.30 in May 2016.
Growthpoint Properties’ surprise play for CRP suggests there is still plenty of upside recovery left in the UK Reit market.
The company, which is the JSE’s largest SA-focused property counter with a market cap of R67bn, made an offer this month to buy a 51.2% stake in CRP for an effective R2.8bn. Though that represents only a small portion of Growthpoint’s R139.4bn portfolio, the deal will be its first UK investment and will push offshore exposure to about 32% of total assets.
Growthpoint already has interests in Australia via listed Reit Growthpoint Australia (GOZ), as well as in Romania and Poland via London-listed Globalworth Real Estate Investments.
Growthpoint’s SA portfolio includes more than 400 shopping centres, office blocks and industrial buildings, as well as a 50% stake in Cape Town’s V&A Waterfront.
Growthpoint group CEO Norbert Sasse and Estienne de Klerk, Growthpoint SA CEO, are known for their dealmaking prowess, and the timing of their UK entry could prove as successful as their Australian foray.
Growthpoint’s GOZ investment of R9.6bn has a current market value of R19.6bn.
The Australian exposure has also been a major contributor to Growthpoint’s income growth in recent years.
Speaking at Growthpoint’s recent results presentation, Sasse said that when it entered Australia in 2009 that country’s Reit index had collapsed 80% from its 2007 peak.
"We are now seeing a similar scenario in the UK, where property stocks are trading at discounts to NAV of between 40% and 80%. The relative weakness of the pound also helps. So we think our entry into the UK could be equally well timed."
Growthpoint itself hasn’t suffered quite the same savaging at the hands of the market as some of its peers, though it is 29% down since hitting a peak of R31.32 in March 2018.
CRP listed on the LSE in 1986 and owns a property portfolio worth £764m, which includes seven mid-sized (or so-called community) shopping centres located predominantly in London and the southeast of England.
The company already has an SA connection through two of its board members: property tycoon Louis Norval, who also sits on the board of Hyprop Investments, and chartered accountant and former FirstRand executive Wessel Hamman.
Sasse said they like CRP’s retail centres because they focus on the daily needs, not wants, of shoppers.
"So they tend to be more defensive through economic downturns."
The political uncertainty surrounding Brexit makes it easy to forget that the UK remains the world’s fifth-largest economy.
The idea is for Growthpoint to provide further capital support to CRP to take advantage of current depressed UK market conditions to buy more retail assets. "We are taking a long-term view," Sasse said.
While analysts say there is certainly value to be had in the UK Reit market, Growthpoint’s UK expansion plans are not without risk.
Wynand Smit, real estate analyst at Anchor Stockbrokers, says Growthpoint’s intention to slow further investment in GOZ and invest in the UK instead could make sense. Australia’s property market is probably at the top of the cycle and the UK is most likely near the bottom.
But he warns that there could be further short-to medium-term pressure on the valuations of UK shopping centres.
Peter Clark, London-based portfolio manager at Investec Asset Management, voices similar concerns. While the deal looks attractive on a longer-term basis, "only time will tell when rentals and asset values in the UK retail market will stabilise".
Clark says the UK retail market continues to face challenges — including negative property valuation trends and changing consumer behaviour amid growing adoption of e-commerce, which has led to the demise of a number of retailers, especially department stores.
And while there appears to have been a slowdown in the number of debt-laden retailers entering company voluntary arrangements (CVAs) — which has forced mall owners to lower their rentals — Clark believes negative sentiment is unlikely to lift anytime soon.
"The likes of Primark, H&M and Clarks are all seeking rental reductions on the back of their peers’ CVA processes," he says.
Ultimately, is this tie-up in the best interests of shareholders?
Mvula Seroto, portfolio manager at Catalyst Fund Managers, believes the deal makes sense for shareholders of Growthpoint and CRP alike. "Growthpoint’s equity injections will help recapitalise CRP’s balance sheet and mitigate against the risk of debt covenant breaches in the short term," he says.
The pricing also appears attractive to CRP shareholders.
Though Growthpoint’s offer price remains well below CRP’s last reported NAV, Seroto notes that it represents a significant premium of 85% to the volume-weighted average price that CRP was trading at on the LSE in the six months to September 10 (the day before the initial announcement of a potential transaction). He says for Growthpoint shareholders, the value-add lies in the potential longer-term, post-Brexit recovery of the UK retail environment.
Meanwhile, Growthpoint has the opportunity to buy into a strong management platform and potentially underrented retail portfolio.
Seroto refers to CRP’s management successfully capturing rental growth on renewals for the June reporting period.
But he agrees that there is a risk of further asset write-downs in CPR’s portfolio.
"That could mean Growthpoint will need to provide further equity injections in the future to avoid CPR breaching its debt covenants," he says.