Listed property sector pursues consolidation

The impressive rise in the fortunes of the listed property sector reads like a Cinderella story: it has gone from what one fund manager described as the "most unloved sector on the JSE", with a collective market capitalisation of just R20-billion in 2003, to one valued at more than R400-billion.

In a flurry of deals in the past four months, the Competition Tribunal has approved more than 10 large mergers, acquisitions and share buy-ins. There is also increased interest by investors on the JSE who are finally recognising the sector as a separate asset class.

The strong performance continues to be driven by lower-than-expected bond yields, pushing property prices up.

Data from Old Mutual Investment Group and I-Net Bridge show the listed property sector on the JSE outperformed all other asset classes - equities, bonds and cash - to end last year at a recordhigh.

It is not surprising, then, that mergers and acquisitions in this sector attract attention and speculation, but industry observers warn investors to make sure that a merger offers value and is not just done to show growth on a company's books.

Maurice Shapiro, a director at Ma'alot Investments, said: "In some ways, consolidation is good because it increases liquidity for small funds, but as an investor, (fewer) funds means less choice, which isn't great."

Of concern is that large listed property groups could buy out smaller entrants to drive up their growth figures. "The bigger funds are motivated to buy out smaller funds as they need to do big deals to assist earnings in a meaningful way. There isn't enough unlisted property to buy to do meaningful deals for them," Shapiro said.

The reason smaller listed property players may merge with other entities is that property assets become more expensive in a property boom and larger funds have a competitive edge because it is easier for them to raise money cheaply, according to fund managers.

Evan Jankelowitz, a director of Sesfikile Capital, said physical portfolios were hard to come by. Listed property can adapt to changing market conditions quicker than physical property assets, which is why it is popular with investors.

Some recent deals include one of the biggest of the year, the acquisition by Growthpoint, part-owner of the V&A Waterfront, of Acucap, which has some of the top retail assets in Cape Town, including N1 City and the Bayside Mall.

Meanwhile, Vukile, the co- owner of the East Rand Mall, announced it had acquired a stake in small mall property company Synergy.

The merger between Rebosis, the owner of Hemingways in East London, and government property owner Ascension Properties is poised to be concluded, while Redefine continues its efforts to buy Fountainhead. Arrowhead, with a share in the Sasol head office in Gauteng, has acquired property developer Jika Properties.

Part of listed property's appeal is the strong returns it delivers. The sector also inspired confidence with its resilience during the global credit crisis. Fund managers warn, however, that a weaker economy and excess supply in the market will weigh on returns.

Shapiro believes the flurry of new funds being listed on the JSE will taper off within two years as investor interest in small funds wanes, but he does expect to see some internationally focused funds listing or unlisted funds coming to the market. "Expect some activity in the next two years, but very little  activity in three to five years' time," he said.

Investec Property Equity Fund's Neil Stuart-Findlay said consolidation should be undertaken only when the acquiring company had the ''superior skills to extract value from target companies" to ensure value for shareholders.

It is anticipated that total returns in the sector are likely to slow. Jankelowitz said he did not expect listed property to continue averaging 22% in total returns. "Property still offers good value but we are not expecting fireworks. We still see good value for the medium- to long-term investors and it should continue to be part of any balanced portfolio."

He said total returns would be 10% to 11% over the medium to long term, which was still areasonable return. "If global bond yields stay low, where they are, then the listed property sector will have a leg up."

Stuart-Findlay agreed: "Sector returns will moderate from the exceptional levels seen over the past decade as global yields rise over the medium term to more normalised levels."

The offshore sector is expected to offer new investment opportunities with the listing of funds with large or exclusive offshore interests.

Fund managers fancied Hyprop for its good management and focus on high-end retail.

Jankelowitz said he also likes Vukile, while Stuart-Findlay favours Arrowhead, Texton and Nepi. Shapiro's favourites are Vukile, Octodec and Redefine Properties.