Ascension hits the ground floor running

The real estate listing boom continues with Cape Empowerment spin-off Ascension Properties making its JSE debut this week. That brings new property listings since April 2011 to nine. The sector’s market cap is now pushing R170bn, up from R133bn a year ago.

Ascension comes to the market with a portfolio of 17 buildings valued at just below R1bn. The initial portfolio, like those of most other new listings, is relatively small compared to the R5bn-plus assets that around half of the JSE’s 25 counters typically own.

Like many of its newer counterparts, including Arrowhead Properties, Synergy Income Fund and Dipula Income Fund, Ascension offers a split A and B unit structure. However, Ascension differentiates itself in that it focuses exclusively on offices leased to government, parastatals and what management refers to as “empowerment-sensitive” companies.

Though analysts are becoming increasingly circumspect about new listings, Ascension last week raised R374m though a private placement. That exceeds the minimum of R260m but is lower than the maximum of R550m management was hoping for.

The A units, which offer an attractive forward yield of 10% and virtually guaranteed growth of 5%/year in distributions, were oversubscribed. However, less than 50% of the B units on offer were taken up. The latter were issued at a forward yield of just over 9% and forecast growth of 10,8% in distributions for the year ending June 2014. That compares to the sector’s forward yield of 7,8% and 5% average growth outlook.

Evan Robins, senior portfolio manager for listed property at Old Mutual Investment Group, says the A units’ risk-adjusted pricing of 10% coupled to annual growth of 5% is attractive, especially for risk-averse investors who are looking for predictable cash flows like those typically offered by inflation-linked corporate bonds.

Ndlovu agrees, saying Ascension’s A units offer more attractive yields than any of the existing split-structure property listings. “We are also comforted by long government leases of typically 10 years, low gearing levels and Ascension’s solid management team.”

Ndlovu refers to, among others, executive director Shaun Rai, who was instrumental in establishing and growing Ascension’s property portfolio over the past six years under the Cape Empowerment banner, of which Rai is CEO.

Rai, a chartered accountant who started dabbling in residential development as a sideline in the early 1990s, is also a former director of Ambit Properties, which was taken over by Redefine Properties in 2010.

The landmark Foretrust building on Cape Town’s foreshore was Rai’s first major commercial property acquisition, in 2006. It was later sold to Ambit, then inherited by Redefine and recently sold to Vunani Property Investment Fund.

Rai concedes that like most other new listings, lack of size and liquidity will initially be a challenge. However, management’s aggressive growth plans should address liquidity concerns over time. Rai plans to grow the portfolio by at least R1bn/year. Management is currently looking at a deal pipeline of at least 20 properties worth R2,1bn.

Rai says while Ascension’s portfolio is not the most exciting it is defensive, as government-tenanted buildings offer long, stable leases and predictable rental growth prospects.

He dismisses fears that government is becoming an increasingly risky tenant. He says arrears and late payments have never been a concern in the six years that Ascension has let office space to public works. “Government by and large is actually a very easy tenant to manage once you understand what their needs and expectations are.”

As one of the few empowerment players in SA listed property, Ascension will no doubt continue to benefit from opportunities to secure long-term leases with government tenants. And there’s no denying that government can be a lucrative client to have as it spends an estimated R1bn/year on renting office space from the private sector.