International News

Offshore property: Check the fundamentals

Given the stellar performance of a number of rand hedge property stocks last year, it’s tempting to switch from SA-focused counters to those that offer hard-currency income streams.

Last year, five of the JSE’s offshore property offerings delivered a total return of more than 40%. These are long-time market darling New Europe Property Investments (Nepi), Capital & Counties Properties (Capco), Rockcastle, Sirius Real Estate and Tradehold.

However, analysts are cautioning investors against a knee-jerk reaction.

Sesfikile Capital director Mohamed Kalla says investors are understandably keen to step up their offshore diversification because of SA’s dismal growth outlook and the possibility of further currency weakness. But the ever-growing pool of offshore offerings on the JSE, as well as local players’ ongoing diversification into markets outside SA, means that investors need to be discerning in their stock selection. “Don’t just run away from the rand. Put your money only in companies whose property fundamentals stack up.”

Catalyst Fund Managers investment manager Paul Duncan has similar advice: “The composition of the SA-listed property index has undergone a significant change, seen from a geographical perspective. Investors need to focus on the long-term prospects of individual companies, the assets these have acquired and their ability to deliver sustainable growth.”

Latest industry data shows that around 35% of the SA-listed property sector’s earnings now come from offshore markets. The number of rand hedge property stocks has swelled from only one 10 years ago (the previous Liberty International, now known as Intu Properties) to 15 today.

In addition, a number of SA-focused funds, including Tower Property Fund, Texton Property Fund, Vukile and Attacq, have recently entered the UK and European markets. Tower last week announced it would be investing up to a third of its portfolio in Croatian shopping centres.

Last year’s performance of rand hedge stocks is impressive compared with the muted average total returns delivered by the listed property sector and the all share index at 8% and 5% respectively, according to Catalyst’s figures.

Analysts expect another tough year for SA-focused property stocks, with total return forecasts averaging between 4% and 8%. “It all depends on where the bond market settles,” says Nesi Chetty, head of listed property at MMI Investments & Savings. He notes that the pace at which the SA Reserve Bank hikes rates over the next 12 months will be crucial to the performance of SA-focused property stocks. “We also need to follow the SA credit rating reviews closely. Any further downgrade will be negative for the sector.”

Chetty therefore expects most offshore-focused property counters to outperform SA-focused ones again in 2016, despite rising geo political tension and China’s growth worries. He says the offshore property companies have higher dividend growth prospects and lower debt funding costs than their SA-focused counterparts.

As far as prospects for individual offshore listings go, Kalla is placing his bets on Capco, Investec Australia Property Fund (IAPF) and Intu Properties.

Kalla prefers counters that have a 100% exposure offshore, instead of stocks that own bits and pieces in foreign real estate markets. “Local players should stick to the market they know best. SA players that are only now trying to build a presence offshore may find it is too little, too late,” says Kalla.

He says that despite Capco running hard last year, the counter still offers upside due to the quality of its central London assets and management’s track record of creating rental and capital growth opportunities. Capco owns the Earls Court estate, which is being developed into one of London’s largest new housing districts, and trendy shop, eat and play precinct Covent Garden.

IAPF, which owns a small but growing portfolio of quality office and industrial buildings across Australia, is Sesfikile’s top value pick, Kalla says. “The stock is trading at a forward dividend yield of more than 8% in Australian dollars, which is good value compared with yields of less than 5% for most other offshore counters.”

Kalla regards Intu, which owns some of the biggest shopping centres in the UK, as the sector’s strongest recovery play. The company has in recent years struggled in a weak UK consumer market but is poised to benefit from Britain’s economic recovery. And a number of five-year leases are coming up for review this year, which should translate into rental growth.

Kalla notes that the share, which has come under pressure in recent weeks, is now trading at a dividend yield of about 5% and an almost 30% discount to net asset value. “That makes Intu attractive from a valuation point of view.”

Meago Asset Managers director Anas Madhi says that since the rand appears to be undervalued at present, the company is cautious about the valuations of several offshore-focused stocks.

He says those where Meago still sees opportunities are Romanian-focused Nepi, Redefine International and Capco. “Nepi offers a development pipeline in Eastern Europe that is unparalleled in the sector and is highly likely to deliver above-market dividend growth over the medium term. The company also has low levels of gearing. Future debt financing will benefit from easing EU monetary policy.”

Madhi says Redefine International holds a well-diversified property portfolio across Germany and the UK that has been strengthened by the acquisition of the £490m Aegon acquisition (to be completed early this year). He says the dividend yield of close to 7% is attractive and that recent share price weakness offers a buying opportunity.

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