The growing pool of JSE-listed property stocks that generate 100% of their earnings offshore — around 20 at last count — is likely to continue to lure most of the flow of money into the sector in the short term, given SA’s dismal growth outlook.
However, since the rand’s movement against major currencies has become so unpredictable it would be foolish to place all your eggs in one basket. Remember last year, when those who bet against the rand got it horribly wrong? A number of rand hedge stocks ended 2016 more than 30% down.
Besides, there are still some SA-focused property counters that are delivering dividend growth well ahead of inflation and are backed by astute management teams that are expanding their SA footprints offshore in a defensive bid to counter the SA downturn.
Hyprop Investments is one of them. Close to 80% of the company’s portfolio is still SA-based. These include a number of shopping centres, such as Rosebank Mall, Hyde Park Corner and Clearwater Mall in Johannesburg and Canal Walk and Somerset Mall in the Cape. Besides, Hyprop also has a R3.1bn exposure (9% of total assets) to the rest of Africa via five malls in Ghana, Zambia and Nigeria as well as a R4.3bn portfolio (12% of total assets) of malls in Southeastern Europe.
The company is expected to deliver 12% growth in dividend payouts when management announces results for the year ending June on September 1. This is attractive compared with the no more than 5%-7% that is likely to be achieved by most other SA-focused property stocks this year.
Granted, Hyprop is facing some headwinds on the back of weak consumer spending and more retailers closing shop (among others, Stuttafords and River Island). This has no doubt contributed to the counter’s underperformance over the past year in terms of its share price — Hyprop is down 16% for the year to August 10.
Liliane Barnard, CEO of Metope Investment Managers, says the currency and earnings volatility experienced by Hyprop’s African assets as well as uncertainty about how the newly acquired Southeastern European malls will perform have added additional risk to Hyprop’s portfolio, which is a concern to investors.
She says: "Hyprop’s recent underperformance has meant that the stock has lost the substantial premium rating it always enjoyed." But the upside is that the softer share price could create an attractive entry point for investors with a long-term view and those looking for continued strong dividend growth, she says.
At a current price of R118.00, Hyprop offers a 12-month forward yield of 6.7%. That compares with around 7.5% for the sector as a whole, which means that Hyprop is now trading at a substantially smaller premium than the 2% plus still seen 12 months ago.
Craig Smith, head of research at Anchor Stockbrokers, expects Hyprop to continue to report above-market dividend growth. Distributions per share are forecast to increase by an average 9%/year over the next three years. "Despite the current headwinds faced by the retail property sector, we still like Hyprop as it owns what is arguably the best-quality shopping centre portfolio in SA," Smith says.
He says it appears that Hyprop is also buying good-quality assets in a measured manner in Southeastern Europe, where funding spreads are still very attractive — acquisition yields of 7% to 7.5% comfortably exceed interest rates, (generally still below 2%).
Hyprop’s latest acquisition in Bulgaria is a case in point. The company last month acquired, via its 60% stake in UK-based Hystead, what is regarded as the premium shopping centre in the capital, Sofia for €156m.
The 52,000m² centre, which is known as The Mall, is Hyprop’s fourth acquisition in the region — Hystead also owns malls in Macedonia, Montenegro and Serbia — and takes the company’s exposure to the region to €460m.
Hyprop CEO Pieter Prinsloo says the mall will provide critical mass to its portfolio in Southeastern Europe and is the company’s first acquisition in an EU capital.
Though Southern, Central and Eastern Europe still appear to be the most favoured destination for local property players looking to diversify offshore, both Barnard and Smith caution that the region is not entirely without risk. Pressure on future returns may come from lack of liquidity, limited availability of accurate and timeous property data, the possibility that supply will start to exceed demand and increased competition for assets.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.