Although Investec Australia Property Fund has lagged behind some of its JSE-offshore listed counterparts on a total return basis to investors, management is gung-ho about growing the fund.
Latest figures from Catalyst Fund Managers indicate that Investec Australia Property Fund only amassed 0.13% in total rand return year-to-date (January to the end of June) compared with the sector’s 6.61%.
This follows a drag on the fund’s return of -5.53% in February, which subsequently rebounded in April, as it recorded a 6.73% return for investors. Total return includes capital and income growth.
Investec Australia Property Fund’s share price has dropped by 1.2%, trading at a narrow range of R11.55 to R11.65.
Some offshore counters have trumped the fund’s return for the period including; New Europe Property Investments (22.77%), Rockcastle Global Real Estate (13.16%), Sirius Real Estate (8.47%) and Redefine International (1.93%).
Investec Australia is no doubt in better shape than other offshore counters, as MAS Real Estate saw returns drop by 18.78%, Intu Properties by 0.68% and Stenprop by -0.94%.
The fund’s growth
Despite the slump in the return, most local industry players positively rate Investec Australia Property Fund on three counts; solid operational performance, management and hard currency earnings.
The counter, which was born from investment banking heavyweight Investec and listed on the JSE’s main board in 2013, has since enjoyed support from local individual and institutional investors.
As the fund’s CEO Graeme Katz puts it: “Investec Australia Property Fund was not a hard sell to South African investors. The share was oversubscribed at listing and the subsequent capital raise in October last year was once again oversubscribed. There certainly is an appetite for our offering.”
The fund, which is 18% held by Investec, has since been aggressive with its growth targets. It listed with an office and industrial property portfolio worth A$129.9 million (R1.2 billion) and has over the years grown the portfolio to A$361 million (R3.3 billion). Its strategy is to invest in high-quality buildings in metropolitan areas and near transportation nodes.
It has also grown its asset base from nine properties located in Brisbane, Canberra, Adelaide and Melbourne to managing 17 office and industrial properties. By the portfolio’s value, the company’s sectoral split is 70% office and 30% industrial.
Katz says the fund has the capacity to acquire more assets worth A$60 million (R549 million) to A$70 million (R642 million), given its gearing level (the balance between its debt to equity). With a gearing level of 30%, it means Investec Australia Property Fund has room for more debt to fund acquisitions.
“For us, our target of gearing is 35% to 40%… We can go beyond 40%, but our board is reasonably conservative. And we are not about putting capital at risk,” he says.
Ultimately, Katz would like the fund to grow by A$1 billion (R9.2 billion) in the next two to three years.
The company is looking to make its foray into the retail sector but has struggled to find assets that “tick all the boxes”. However, the fund is still relatively small, with a JSE market capitalisation of R2.9 billion, up from R1.6 billion when it initially listed.
The fund has largely benefitted from Australia’s macroeconomic factors and property fundamentals. Recently, yields in the office market have slowed down as a result of capital inflows and investments into Australia from China, Germany and Canada. But yields become attractive on the back of Australia’s low interest rates. For example, Katz says, assets can be acquired at a yield of 7.5%, while all-in funding costs are 4%.
The Australian market is also known for long leases, which guarantees property counters prolonged rental income. The fund’s weighted average lease term is six years with vacancies of 0.3% across its portfolio.
More counters including Growthpoint Properties, Redefine Properties and Emira Property Fund have bulked up their Australia exposure to offset South Africa’s tepid economy and property fundamentals. Investec Australia Property Fund is trading at a forward yield of around more than 7%, compared with the listed property sector’s average of 7%.