JSE's listed property market cap exceeds R400bn
Sector braced for more consolidation.
Investors on the Johannesburg Stock Exchange (JSE) have been spoilt for choice with the listed property boom. The JSE says it has 51 property companies listed and the sector boasts a total market capitalisation of over R400 billion.
“The past decade has been an exceptional one for listed real estate in South Africa both in absolute terms as well as relative to other asset classes,” explains portfolio manager of the Investec Property Equity Fund Neil Stuart-Findlay.
Stanlib head of listed property funds Keillen Ndlovu supports this view: “The market capitalisation has grown over ten times over the last ten years.”
Some of the property counters which have debuted on the JSE include Tower Property Fund, Accelerate Property Fund, Visual International Holdings, Safari Investments, Attacq Property Fund, Equites Property Fund and Freedom Property Fund. In December Pivotal Property Fund will list as development fund on the main board.
Stuart-Findlay says beyond 2014 more development and residential focused funds might list. “We are supportive of new listings that bring alternative investment strategies and hence greater investment choice to the sector.”
But the listed property sector is poised for further consolidation, as some of the new entrants are becoming take-over targets. Sesfikile Capital director Evan Jankelowitz says indications of consolidation are part of a property cycle, as the number of listed property companies expand and contract through cycles.
The sector has claimed its title of being the most active on the JSE, with mergers and acquisitions dating as far back as ten years ago.
“What typically happens is that larger, more liquid companies achieve a better rating than smaller, less liquid ones and this provides opportunities to ‘bootstrap’ earnings – in effect buying higher yielding companies by issuing lower yielding shares,” Jankelowitz explains.
Jankelowitz adds that in boom times, the prices of physical assets become expensive, leading to larger funds having a competitive edge to raise money cheaply. “Smaller funds don’t necessarily enjoy this benefit,” he says.
The fresh speculation of consolidation has been spurred by Redefine Properties’ 11% bid for Emira Property Fund worth over R800 million. The transaction has effectively made Redefine the biggest shareholder in Emira. Redefine – the second largest property company by market capitalisation (R35 billion) – also attempted to acquire Fountainhead Property Trust’s entire assets and interest bearing debt, but failed to secure shareholder support.
Sister companies Octodec Investments (Octodec) and Premium Properties (Premium) facilitated a long-touted merger. “We are in favour of the Premium and Octodec merger. It makes a lot of sense and there were great efficiencies built in the merger and both strategies work,” says Jankelowitz.
Other deals which point to the trimming down of the sector include Arrowhead Properties bid for a 31.7% stake in Vividend Income Fund, the recent collapse in talks by Vukile Property Fund to acquire a 34.5% stake in Synergy Income Fund and the failed tripartite merger of Rebosis Property Fund, Delta Property Fund and Ascension properties. “There is still lots of activity and so many things to look forward to. It’s never a dull sector,” says Ndlovu.
More deals may be on the cards, says Jankelowitz, but in some cases corporate action is questionable. “In some of these we believe some companies are doing acquisitions for the sake of growing and using their balance sheet, as their ability to fund deals is stronger than smaller players.”
Such an example would be Growthpoint Properties’ acquisition stakes of 34.9% in Acucap Properties and 31.5% in Sycom Property Fund for R4.7 billion to increase its retail exposure.
“We are not sure they will be able to add significant value by acquiring a generally well managed portfolio in Acucap and Sycom.”
Consolidation should make sense where the merging teams have “superior skills to extract value from the target’s properties,” says Stuart-Findlay.
“We are not supportive of a ‘bigger is better’ view with regard to consolidation – there needs to be a sound strategic rationale which will lead to enhanced shareholder returns for the deal to make sense.”