Offshore property stocks are back in favour, accounting for most of the JSE’s top 10 best performers
The share price performance gap between the 50-odd individual stocks that comprise the JSE’s R500bn real estate sector has widened to nearly 50% in the year to date.
Top-performing counter Sirius Real Estate is up 27%, and worst performer Accelerate Property Fund is down 21%.
Besides German-focused Sirius, the top 10 best-performing stocks in the year to date include mostly rand hedges, according to Absa Asset Management. These shares include Greenbay Properties, which has exposure to Portugal and Slovenia, and has risen 21%; Polish-focused Globe Trade Centre (15%); Schroder European Real Estate Investment Trust (11.5%); Central and Eastern Europe-focused New Europe Property Investments (Nepi) (11%); and Rockcastle (9%).
This follows last year’s underperformance of foreign stocks, when the share prices of a number of counters dipped into the red on the back of a stronger rand and concerns about how Britain’s decision to exit the EU would play out.
About 20 of the sector’s 50 counters are pure offshore plays, up from only one a decade ago (Liberty International, now known as Intu Properties).
Today almost 50% of the SA listed property sector’s market cap of about R500bn represents offshore real estate portfolios. Keillen Ndlovu, Stanlib head of listed property funds, says these are spread among no fewer than 25 countries — the US, UK, France, Australia, Romania, Poland, Spain, Slovakia, Slovenia, Germany, Portugal, Croatia, Serbia, Macedonia, Cyprus, Montenegro, Morocco, Switzerland, the Czech Republic, Bulgaria, Mauritius, Nigeria, Zambia, Namibia and Ghana.
Ndlovu notes that the sector’s biggest exposure in terms of market cap weighting is to Central and Eastern Europe (CEE) at 15.9%, followed by the UK at 14.8%, other Western European countries at 4.7%, the US at 4.4% and Australia at 4.3%. Exposure to African countries other than SA sits at only 1.5%.
While the rapid growth in the JSE’s bevy of property stocks that generate 100% of their earnings offshore is positive, as it creates more choice for South Africans looking to spread their risk outside the country, it also requires investors to become far more discerning in their stock selection choices.
Craig Smith, head of research at Anchor Stockbrokers, says investing in rand hedge stocks is no longer purely about currency diversification. "Investors need to do their homework to understand the growth prospects and fundamentals relevant to each individual company and country," he says.
The factors affecting rental and capital values can vary significantly, not only for different subsectors of the real estate market such as offices, retail, warehousing and student housing, but also for different countries, Smith says. "UK prospects, for instance, are very different now from those of Western Europe, the CEE region, Spain or Portugal."
With share prices of some offshore stocks already running hard, the question arises whether investors who don’t yet own shares in rand hedge counters have missed the boat.
If not, which stocks offer the best buying opportunities?
Most fund managers are still bullish on Hammerson, which has its primary listing in London and is one of the largest mall owners in the UK and Western Europe; Mas Real Estate, which recently broadened its focus on UK and Western Europe to the CEE region; Nepi Rockcastle, now the largest mall owner in the CEE region following this month’s successful merger between the two sister companies; and Sirius.
Sirius is particularly interesting, as it is the JSE’s only 100% German-focused property play and has arguably been one of the sector’s most consistent rand hedges in terms of share price and dividend growth performance.
Since the company listed on the JSE’s AltX on December 5 2014, the stock has risen 65%. Sirius, which recently migrated to the JSE’s main board, continues to grow its dividend payouts at double-digit rates.
For the year ending March, Sirius declared a total dividend of €2.92c/share, an increase of a hefty 32% year on year. That’s way ahead of the 7%-8% dividend growth being achieved by most SA-based property stocks. The company’s impressive growth record is thanks mainly to its strategy of buying older, underrented industrial parks on the outskirts of major cities and unlocking rental and value growth through redevelopments and upgrades.
Sirius owns 46 business parks across various German cities valued at close to €960m (R13.4bn). A portion of the company’s income is secured by long-term leases with large corporations such as Siemens‚ Daimler and GKN Aerospace. The balance is from mixed-use flexible workspaces aimed at small and medium-sized enterprises.
During a visit to SA earlier this month, Sirius CEO Andrew Coombs said management is on track to increase the portfolio value by 50% while also taking advantage of market conditions to recycle mature and noncore assets.
Nine acquisitions worth €135.8m were already concluded after the year end, which underscores just how aggressively the company is growing its portfolio. Buildings worth about €110m were sold in the year ending March.
Coombs said the company is interested only in buying discounted assets with large vacancies, preferably exceeding 50%, at yields of about 8%.
"Our expertise is to turn underrented buildings around through upgrades and redevelopments, mostly within 12 months," he says,
He notes that Sirius buildings typically fetch rentals of €2-€3/m²/month when they are first bought. After spending about €3/m² for upgrades, the average monthly rent jumps to €8-€9/m². "That’s a 40% uplift in rental values alone."
Coombs said the political mood in Germany has improved in the run-up to the September elections. The consensus is that another Angela Merkel-led coalition government is likely to be elected, which will support stability and investor confidence. "Germany’s economy is strong at every level. There are cranes on the ground everywhere, restaurants are full, banks are lending to the small business sector and unemployment levels have been at virtually zero for the past three years. That bodes well for continued demand for space in our business parks."
Metope Investment Managers analyst Kelly Hook still sees value in the Sirius share price despite the strong run in the year to date.
"We expect Sirius to continue to outperform the market," she says.
Though the counter is trading at a relatively demanding 5.7% forward yield and 12% premium to net asset value, the company’s growth prospects remain attractive, she says. "Sirius is not a Reit [real estate investment trust] and so pays out only 65% of its funds from operations. It reinvests the remainder in capex projects and acquisition opportunities, where it targets a 20%-plus return on investment."
Brendon Hubbard, portfolio manager at ClucasGray Investment Management, agrees that the share price offers further upside.
His view is based on a number of factors, among them that European property investment company Hansteen, which owned similar properties to Sirius, recently sold its entire German portfolio to US asset manager Blackstone at a gross yield of 6.7%.
"If this metric is applied to Sirius, the company’s net asset value moves closer to 70pence, instead of the 58.8p reported in the year ending March."
Hubbard says future earnings will be supported by acquisitions, which are being made at a 14% cash-on-cash yield in an environment where borrowing costs are at 1.48%.
"Analysts’ consensus is that Sirius will report another 10% increase in dividends [in euro to the end of] March 2018, which is significantly above that of other Western European property companies," Hubbard says.
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