Dealing with listed property

It’s only three months into 2012 but it seems this is going to be another busy year for the listed property sector on the corporate action front.

Around R16bn (Stanlib figures) in new equity was added to the sector in 2011 through no fewer than six new listings and a number of capital raisings by existing counters to bring previously unlisted properties to the market.

The latter included mega deals like Growthpoint Properties’ R5bn investment in the V&A Waterfront and Hyprop Investments’ R9bn acquisition of Attfund’s shopping centre portfolio. By yearend, the sector’s market cap had ballooned to R145bn.

Deal making has continued, with acquisitions worth more than R4,5bn expected to be finalised in the first half of 2012. While most of the action is coming from the newer, smaller listings that are keen to grow their portfolios, it is established player Vukile Property Fund that is responsible for one of the biggest deals concluded so far this year — a portfolio of 20 properties acquired for R1,5bn from Sanlam Life Insurance.

Among the newer stocks, Vividend Income Fund is buying 10 retail and commercial properties for R790m from unlisted empowerment vehicle Vusani Property Investments, while Investec Property Fund has pending acquisitions valued at R330,9m.

Rebosis Property Fund is adding six commercial buildings valued at R734m to its portfolio. The acquisition comprises mostly governmenttenanted offices in Pietermaritzburg, Durban, Johannesburg and Mafikeng.

In a deal worth R530m, retail-focused Synergy Income Fund, which was cofounded by the Spar group and made its JSE debut in December, is buying two shopping centres from unlisted Old Mutual Ideas Fund — Gugulethu Square in the Western Cape and Setsing Crescent in the Free State.

Dipula Income Fund is bulking up its portfolio of rural and township shopping centres with three retail properties worth R247,8m, while Vunani Property Investment Fund is adding the Foretrust building in Cape Town, bought from Redefine Properties for R249,5m, to its officefocused portfolio.

Last month Redefine announced it was buying the 50% of Southcoast Mall it didn’t already own for R108,5m from Hyprop. Last week Arrowhead Properties, the high-yielding play that was unbundled from Redefine, announced a deal in which it would acquire a portfolio of eight office properties from Growthpoint for R167,6m.

Increased deal flow is generally good news for investors as it improves size, liquidity and choice. However, it raises questions about whether the sector may be chasing growth for the wrong reasons: property stocks with external management companies in particular have in the past been accused of doing deals primarily to increase fees.

Moreover, is there enough demand for listed property scrip to support debt and capital raisings to finance these deals?

Jay Padayatchi, director of property asset managers Meago, says given that listed property is trading at a lower forward yield than that of physical property — around 8% for the sector versus 8,5%-10% for unlisted retail, commercial and industrial buildings — it makes sense for property stocks to bulk up portfolios while acquisitions are yield-accretive. In other words, now, while physical property prices are relatively attractive, is a good time for listed funds to buy buildings.

“At the same time, there has been a healthy flow of pension fund and retail money into listed property over the past year, which is underpinning demand and share prices, making it easier for listed property companies to raise the equity to finance these deals,” says Padayatchi.

Padayatchi expects increased corporate action in the next six months, and at least three new listings. There’s also scope for mergers and takeovers. Redefine’s 31,2% stake in Hyprop could be for sale and Hyprop may offload its 39% holding in Sycom Property Fund.

Padayatchi says some of the higherrated, low-yielding stocks are starting to look at the smaller, newer listings that are trading at markedly higher yields.

“Takeovers or mergers may receive substantial shareholder support, given the frustratingly low levels of liquidity among many of the new listings.”