The real estate sector of the SA unit trust industry is a sizeable R64.6bn, substantially larger than sectors such as small caps, industrials, financials and resources. It is almost the same size as the global asset allocation sector.
Property funds have been an easy sell: they usually provide a starting yield higher than sovereign bonds, and they have a built-in rental escalation of 8%. Property was the strongest asset class up to the end of 2017, until financial engineering spoilt the party. Instead of clean rental income, some real estate investment trusts (Reits) started to pay profits made on investment banking activities such as foreign currency trading, and they often bought properties because they knew there was a ready pool of investors to provide costly equity funding.
The public inquiries into the Resilient Group brought this corporate conjuring to wide attention, but few companies in the sector were blameless. The renegotiations of rent with Edcon has had an immediate effect, as it accounts for 3% of the retail space nationally, and its competitors such as TFG have also demanded cuts.
And many property funds might still be hanging 8% increases on renewal, but only by cutting their starting rent by 15% and providing a range of free services. A few funds such as Rebosis and Delta remain in intensive care, but larger diversified shares such as Growthpoint and Redefine should still provide reliable distributions. Yet in spite of these issues there were still inflows of R4.5bn in the year to March 31.
There are broadly three parts to the property sector. There are the domestic shares, which still account for about 55% of the sector market cap. As well as the diversifieds, which include Emira and SA Corporate, there are retail Reits such as Hyprop and Vukile, plus a handful of true specialists such as Fairvest (convenience retail), Stor-Age and Equites (logistics) and Spear (Western Cape).
Historically Liberty International was left out of the SA property index (Sapy) because all its holdings were in the UK and it was bigger than the rest of the sector put together. It has been split into Intu, a mall operator, and Capital & Counties, with more diverse central London properties such as the Covent Garden market.
These shares are part of the new all property index, but remain outside the Sapy. They are by no means dominant anymore — Intu’s market cap of R18.6bn is about the same as Vukile’s and about a quarter of Growthpoint’s. There is a least a choice on the JSE as Intu’s main competitor, Hammerson, decided to list a couple of years ago to tap into the seeming demand for international property from SA investors. But it is an out-of-favour part of the market, with both companies trading on a discount to NAV above 50%; by some measures Intu’s has hit 72%.
The most promising part of the market is shares focused on Eastern Europe. SA entrepreneurs pioneered malls in Romania and Poland. Many funds such as MAS have abandoned their plans to invest in Western Europe and gone East (an exception is Vukile, which has a strong business in Spain). There are fast-growing economies in the region. And they are isolated to some extent by their less widely known languages, which are a barrier to e-commerce.
The funds that we have chosen are not the largest, but each is interesting. Nedgroup Investments Property Fund, run by Bridge, is aggressively focused on SA small caps, as this is where the best yields are found. Capital gains are a secondary consideration.
The Catalyst SA Property Fund is run by the specialist Catalyst listed property managers. It is a more benchmark-aware fund than Nedgroup’s, but it’s active enough not to be considered a closet index tracker.
Hollard Prime Property is run by Sesfikile and tracks the Sesfikile SA Equity Fund. But some investors will prefer to access the fund on the Hollard platform. Like Catalyst, Sesfikile is focused on listed property.
Glen Baker at the Anchor Property Fund brings his experience of alternatives, which makes him concerned about liquidity, and in due course the fund will diversify into the more liquid options overseas. And, of course, everybody should consider an index fund. But a fund such as Satrix Property Index has high concentration risk, which can’t be ignored.
Anchor BCI Property Fund
Real estate is considered an alternative asset at Anchor. The fund is run from Anchor’s Bryanston offices by Glen Baker, who says it did not enjoy the euphoric spike experienced by the sector in late 2017 because it takes a more conservative approach. But since then it has outperformed the index.
Baker did not fill his boots with shares from the Resilient stable, which made up 42% of the index 18 months ago. But he has been nibbling since.
In May, when Fortress was cleared of insider trading he enjoyed a boost from the 8.8% increase in the Fortress B, though it was a modest 2.5% of the fund, as well as its sister companies Resilient (up 4% on 3.4% of the Anchor fund) and Nepi Rockcastle (up 3% on 5.1% of the Anchor fund.)
Baker, unusually, has a 5.3% holding in another property fund, Nedgroup Investments Property. He says the Nedgroup fund focuses on illiquid small caps.
"But as it is a collective investment scheme I can sell units and get my money within 24 hours." In the short term this has not been a good investment, but it is an interesting way to tap into this part of the market.
Baker says his largest "off benchmark" bet has been a chunky 4.2% in logistics specialist Equites. He has modest 1% holdings in Intu and Hammerson as options in case there is a sudden change in sentiment towards these cheap shares. He also holds the more niched RDI International.
Baker says property was once seen as a steady growth sector, with limited volatility. The events of 2018 proved that wrong, but he argues that it is still a good provider of income. He says his clients will need more diversity and he will consider using part of the permitted 30% offshore investment to buy alternatives to the JSE-listed shares.
In the UK he might consider British Land or Land Securities, for example, and in due course bring some North American stocks into the fund. "The local SA shares are linked to local GDP growth."
It is also tricky as many of the large caps are now a lot smaller — Fortress B is about a third of its size in late 2017. But he says there are promising shares in the sector such as Attacq, which will distribute income from its successful Waterfall City development.
Nedgroup Investments Property Fund
The fund is highly focused on companies that derive the bulk of their income from SA. It has a one-year forward yield of 14.5%. It is the only property fund with no exposure to the big three: Growthpoint, Redefine or Nepi Rockcastle.
It is managed by Ian Anderson from Bridge Fund Managers. In its top 10 only Vukile (market cap R18.6bn) could be considered a larger share with a material part of the portfolio overseas, namely in Spanish shopping centres. Nedgroup’s bigger holdings hardly register in the competition and they include Accelerate, Octodec and Arrowhead — each 9% of the fund.
There has been some positive traction from Octodec, Africa-focused Grit, Stor-Age, Safari and Dipula-B, though this has been more than offset by the troubles at Delta, Accelerate, Rebosis, Arrowhead and Fairvest. But Anderson says Delta has recently announced that the public works department has renewed 11 leases, totalling nearly 30,000m², at an average rental of R108 a square metre. It is for five years, with a 6.5% escalation.
The fund buys some shares on lower yields — it recently added to Fairvest, Grit, Stor-Age and Vukile, but this should be short-lived given the promising outlook for these businesses to grow income. However, along with the weaker economy, Anderson warns, these actions will lead to a 5% to 8% decline in distributions for 2019.
He says corporate action could help to reverse this, with Fairvest and Safari looking to merge as well as Arrowhead and Gemgrow.
The fund has assets of R2.5bn, though Anderson says it will be capped at 1% of the SA listed property sector, which will give it the flexibility to take advantage of small-cap outperformance. It also aims for diversification of property type, geographical exposure and management risk.
The key consideration is the likely distribution (dividend) growth over the next three years. Investors sold down property shares — the domestically focused ones in particular — in expectation of a downgrade from Moody’s, which did not take place, and there has been recovery since May’s general election.
Hollard Prime Property
The Hollard investment team under Ashveena Teeluckdharry-Khusial oversees the fund as a multimanager, but for now, with less than R300m under management, it has only one manager, Sesfikile Capital, which runs the fund on very similar lines to its own Sesfikile SA property fund.
Long-term investors in the Hollard fund should realise that a second or third manager could be introduced as the fund grows, but for now Sesfikile seems like a sensible best-of-breed choice. It is comfortably ahead of the peer group, more than three percentage points a year over five years, and has given almost exactly the same returns as its own Sesfikile BCI Property Fund.
Its three portfolio managers all come from award-winning teams — Evan Jankelowitz from the successful Stanlib property team, Kundayi Munzara from Investec Property and Mohamed Kalla, who was the top property analyst while at Barnard Jacobs Mellet.
Kalla says he is comfortable to hold a large 17% holding in Growthpoint. He likes the diversity of the portfolio and the potential from its 50% holding in the V&A Waterfront in Cape Town.
He is pessimistic on the UK, where the move from physical to online is advanced, but still confident about investments into Eastern Europe. The fund has a big holding in Nepi Rockcastle (13%), a shopping centre owner in Poland and Romania, as well as a combined 6% in MAS and EPP.
The move to online is much slower in Eastern Europe and Kalla says that Poles often socialise in shopping centres, especially in winter. He says there are too many generalist funds on the JSE, but Equites, focused on logistics, is a welcome exception.
Satrix Property Index Fund
This is the most convenient proxy for the SA property index (SAPY) but it will expose the investor fully to the ups and downs of the sector.
There would have been nowhere to hide when the Resilient group slid to the bottom in early 2018, and no possibility of weighting the portfolio to the highest dividend shares or the best quality shares. There is also high specific company risk with Growthpoint, Redefine and Nepi Rockcastle accounting for more than 50% of the fund, and Fortress A, Hyprop, Resilient and Vukile about another 25%.
Fund manager Kingsley Williams says there might be a case for changing to the broader all property index (Alpi) but the clients would need to be balloted and it is not clear that there is demand to change.
The index itself changes to reflect market movement. In March Hospitality B replaced the troubled Rebosis, and weightings of Redefine and Equites were increased while those of Emira and Growthpoint were reduced. Williams says the SAPY now offers an attractive 9% trailing income yield, more than the SA long-bond yield which is closer to 8.6%. There could also be a recovery in the capital values of the property shares, which could bring the yields down to 7.5%.
Catalyst SA Property Equity Prescient Fund
Catalyst is a Cape Town-based specialist property manager, previously controlled by the Broll Property Group. About two years ago Broll sold its interest to Sanlam, but it remains an independent company.
Portfolio managers Zayd Sulaiman and Mvula Seroto use the all property index (Alpi) as their benchmark at a time when most of their peer group still use the SA property index (SAPY). The SAPY does not include the UK-based companies with secondary listings on the JSE — Intu, Capital & Counties and Hammerson — which are all in the Alpi, though based on their SA shareholding, not their total market cap.
Recently the Alpi has underperformed the SAPY; it was down about 9% in the year to May while the SAPY fell about 5%. This isn’t only because of the terrible returns from the UK shares, which are trading at a heavy discount to NAV, but also because the Alpi includes small-cap property shares, which are not in the SAPY.
Capital & Counties and Hammerson are in the Catalyst fund’s top 10. This list also includes some of the large shares in the sector such as Growthpoint, Redefine, Nepi Rockcastle, Resilient and Hyprop as well as Fortress A, MAS Real Estate and Vukile.
About 56% of the fund is in retail property, 20% in offices and 17% in industrial property.
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