Vukile Property Fund a value to be had

The market darlings in the listed property sector are not necessarily those that boast the best performing underlying assets. In fact, it seems that the top property stocks in terms of portfolio returns are sometimes overlooked by investors.

Vukile Property Fund is a case in point. The counter last week scooped top honours at the Investment Property Databank (IPD) Direct Property Investment Awards for 2012.

The latter measures the total return performance of more than two thirds of the R180bn listed property sector and unlisted property funds in SA.

Vukile achieved the highest overall annualised total return on its underlying property portfolio over the three years to December 2011: 17,5% compared with the IPD benchmark return of 10,9%.

As far as returns for individual sectors go, Vukile won both the office (16,3%) and industrial (19,5%) awards, while Resilient Property Income Fund achieved the highest returns (17,9%) for a retail property portfolio.

Yet Vukile has underperformed some of its peers on the JSE, with share price growth of around 20% over the past six months — which is comparable to the listed property index’s 19%. Vukile is also trading at a higher yield than the sector: around 7,3% compared with 6,8%. That suggests the stock is cheap, particularly given the sterling performance of its underlying portfolio.

Absa Asset Management listed property fund manager Mariette Warner believes Vukile may be undervalued partly because the fees that Vukile earns from managing Sanlam’s property portfolio are difficult to forecast. “This element of unpredictability in Vukile’s income stream is a problem for some investors.’’

In addition, Vukile’s portfolio — including less-thanglitzy properties like the Randburg Square, Roodepoort Hillfox Power Centre and Dobsonville Shopping Centre in Soweto — may be perceived to be of lesser quality.

But Warner says the IPD property investment results clearly speak to the strength of Vukile’s management team. “A fund can have glamorous assets but it’s no use if it has a poor management team that can’t extract value for shareholders.’’

Warner believes it’s becoming crucial for listed property investors to base their stock picking decisions on management expertise and not on the quality of the portfolio alone. “Lower interest rates are already priced into property share prices so the recent run in the sector is not sustainable. That will require investors to become more discerning than ever.’’

Meago Asset Management director Jay Padayatchi agrees that Vukile is undervalued. He says it’s possible that the market is still hesitant about Laurence Rapp, who replaced Gerhard van Zyl as CEO in August 2011. “Though Rapp’s initial strategy is positive, I think he has still to be properly tested.’’

Padayatchi says the share price may also be depressed on the back of what seems to be a large institutional seller in the market.

But Padayatchi believes Vukile may very well rally over the short term as management continues to refresh the portfolio and greater clarity is obtained on the implementation of the company’s development pipeline.

Rapp recently embarked on an aggressive growth strategy to grow assets and increase liquidity. Historically, the lack of the latter was also a negative to many would-be Vukile investors. So far this year the portfolio has already been bulked up 25% with a R1,5bn acquisition from Sanlam. The next growth phase will focus on increasing Vukile’s exposure to emerging market retail centres.

Rapp says the company recently entered into a joint venture with leading retail developer McCormick to develop five centres aimed at lower-income shoppers — sized from 12000m² to 30000m²

Rapp is also not excluding corporate activity as a means to grow the portfolio, given Vukile’s increased scale and improved liquidity. He refers to Sanlam’s decreased stake in Vukile to less than 6%, partly through the recent sale of a large chunk of units to the Public Investment Corp.

That’s increased the company’s free float weighting from 50% to 100%. Says Rapp: “We are now one of the most liquid stocks in the listed property sector.”