International News

Listed Property: Investec Property Fund’s new CE profile

Nick Riley’s replacement of real estate veteran Sam Leon as CE of Investec Property Fund (IPF) in April has no doubt raised a few eyebrows. At 36, Riley is one of the youngest CE s in the listed property sector and succeeds a man with a formidable track record.

Leon, together with IPF co-founder Sam Hackner, has over the past 20 years acquired an enviable reputation in property development, trading and acquisition. The duo didn’t just bring IPF to the JSE in April 2011 but were also involved in the creation of sector heavyweight Growthpoint Properties prior to its JSE debut in the early 2000s.

However, Riley is no newbie to the listed property sector. The chartered accountant and chartered financial analyst spent 11 years in the Investec group’s corporate finance division, where he was renowned for his clever structuring of listed property deals.

Moreover, Riley’s appointment didn’t happen overnight. He was included in the Investec group’s succession planning while still in corporate finance. Investec owns a 35% stake in IPF. Riley was moved across to IPF a year prior to his appointment to be groomed in plenty of time to take over the helm from Leon.

Though he doesn’t have the track record in bricks and mortar of a Leon or a Hackner, Riley believes he brings a different skills set and network to the table. “Given the growing importance of merger and acquisition activity within the listed property space, I believe my experience in deal structuring and balance sheet management will support the company’s growth strategy.”

Riley has ambitious plans to double IPF’s portfolio to R20bn within the next two to three years. He has already sealed an R826m deal to acquire 22 properties from Griffin Holdings, a major coup given how aggressively listed funds are vying for opportunities to bulk up assets these days.

The Griffin deal will take the portfolio value to R9,5bn, which will enable IPF to deliver on its 2011 pre-listing promises to grow assets to R10bn within five years. Flagship assets include the Balfour Park shopping centre northeast of Johannesburg, The Firs in Rosebank, Investec’s head offices in Cape Town and Pretoria, and Dihlabeng Mall in the Free State.

Though Riley may have a more aggressive approach in terms of deal making and recycling of capital than the previous management, he stresses that the company’s long-term objective hasn’t changed: “Our focus is still on owning quality properties that will maximise capital and income returns for investors over time.”

IPF has a rand hedge component via its stake (5,8% of total assets) in sister fund Investec Australia Property Fund. However, Riley doesn’t necessarily plan to follow the lead of other local property players to look for expansion opportunities offshore. “There’s a bit of a herd mentality at the moment, with everyone focusing too much on short-term rand hedge opportunities in the UK and Europe, which can potentially be ex-growth within the next five years.”

Riley believes the SA property market offers more lucrative deals given the high growth in contractual rentals of around 8%/year. In fact, he says the “knee-jerk” reaction by many listed and unlisted property owners to cash out and diversify offshore is creating attractive opportunities for investors to grow local portfolios.

However, Riley says investors need to adopt a longer-term view and accept that acquiring quality properties that will provide sustainable income and capital growth over time may be dilutive at first. “Many are too focused on 12-month performance metrics. We don’t subscribe to that view as we are not a short-term yield play.”

Fund managers are clearly supportive of Riley’s selection as heir apparent to Leon. Says Grindrod Asset Management chief investment officer Ian Anderson: “We’ve known Riley for some time and believe he’s ideally suited to take the company forward. IPF is at the stage now where it is looking to grow rapidly, and having someone at the helm with a corporate finance background will be advantageous.”

Momentum Asset Management head of property Nesi Chetty has a similar view: “Riley’s appointment as CE will ensure some continuity in the business given his intimate knowledge of the property market, gained as an Investec senior banker responsible for a number of clients within the SA and Australian real estate sectors.” Besides, says Chetty, Leon and Hackner both still serve as non-executive directors, so Riley has a strong board to back him up.

A key question for investors is whether IPF is a good buy at current levels. Anderson believes IPF offers significant value at a forward yield of around 7,6%. That compares with the sector’s average 6,5% yield. He says the fact that IPF’s share price has underperformed the sector over the past year (up 21% versus 24%), is not so much a reflection of what’s happening at IPF but more about the outperformance of bigger companies that have been included in global equity indices, such as Hyprop Investments, Resilient Property Income Fund and Redefine Properties.

Counters that have been involved in corporate activity such as Fortress Income Fund and Capital Property Fund have also experienced strong rallies.

“That means there are now a number of high-quality second-tier companies, like IPF, that are trading at a discount because they haven’t benefited from inclusion in global equity indices or from corporate activity.”

This article was first published by Financial Mail.

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