Listed property companies to seek acquisitions due to tough trading conditions

SA’s listed property sector could be ripe for more consolidation as a number of real estate companies on the JSE are struggling to find attractively priced assets.

More mergers look to be on the cards because yields on buying direct assets are not particularly attractive.

A landmark merger has already been proposed between New Europe Property Investments (Nepi) and Rockcastle Global Real Estate, which could create one of the largest property funds on the JSE.

“Yields on direct assets have remained stubbornly low, despite weak property fundamentals and the cost of capital for listed companies is high,” said Catalyst Fund Managers investment manager Paul Duncan.

“Development yields do not compensate for the risk assumed and speculative development is even more risky, with almost zero net new demand.”

Nepi, which has mainly invested in Romania, and Rockcastle, which has mainly invested in Poland, announced in 2016 that they intended to merge. The two companies had started to look for similar properties in the central and eastern European region.

The proposed transaction would be implemented through a swap ratio of 4.5 Rockcastle shares for one Nepi share. The merged entity would be called NEPI Rockcastle (NewCo).

Nepi has a market capitalisation of about R51.1bn, while Rockcastle has a market cap of about R33bn. A merger would create an R84.1bn fund.

Often when property management teams were experiencing tough operating conditions internally, Duncan said, they looked more aggressively outside their core portfolios for earnings growth opportunities. One way was through corporate activity including acquiring other companies.