Investec Property Fund’s logistics bet is paying off

Investec Property Fund (IPF) is the latest real estate counter to report a better-than-expected recovery in cash flows.

The owner of Joburg landmarks The Firs in Rosebank and Design Quarter in Fourways has delivered a rather humdrum performance in recent years.

Then, last year, it took a sizable earnings knock on the back of millions of rands of Covid-related financial assistance provided to struggling tenants. As a result, dividends were slashed by 34% for the 12 months to March.

However, the tide has clearly turned. Last week management declared an 11.8% uplift in dividend payouts for the six months to September (year on year).

What’s more, joint CEOs Andrew Wooler and Darryl Mayers had the chutzpah to provide dividend growth guidance of 10%-12% for the 12 months to March 2022. Few others in the sector have been prepared to provide much guidance for next year at all.

They cited the stabilisation of the SA business as a key contributor to the fund’s improved performance, which was aided by a sharp drop in rental relief — from R55m to R9m (for the six months to September year on year).

Vacancies in IPF’s R15.5bn SA portfolio have trended downwards over the same time, from 11.4% to 9.4%, and are expected to reach 5%-6% by March next year.

But the key to IPF’s solid set of results is the well-timed entry into the Western European logistics sector. The company first gained a toe-hold in Europe in May 2018 via a €420m stake in a portfolio of 23 existing logistics properties known as the Pan-European Logistics (PEL) platform. IPF has since switched its investments out of unlisted UK fund, Argo, and out of former stablemate Investec Australia Property Fund (now known as Irongate) into the European venture.

Over the past 3½ years, the number of warehouse and distribution centres owned by PEL has more than doubled to 48. The portfolio is spread among seven countries — Germany, France, Spain, Italy, Poland, the Netherlands and Belgium. IPF’s 65% stake of the PEL portfolio is now worth €700m (about R12bn), which equates to 43% of IPF’s gross asset value (on a look-through basis).

Of course, Wooler and Mayers couldn’t have predicted the extent of the Covid-induced rally in e-commerce and the huge impact it has had on demand for modern warehouses and distribution centres.

But their decision to enter the Western European logistics sector, instead of following many of their JSE peers into Eastern European shopping centres, was no stroke of luck. As Howard Penny, equity research analyst at Anchor Stockbrokers, points out: "IPF’s shift to the attractive European logistics sector was a clever strategic decision."

Demand for logistics, from tenants and investors alike, has surged to such an extent over the past 18 months that it now comfortably outstrips supply. Penny says logistics tenant take-up in Europe is up a staggering 23% in square meterage terms in the first half of 2021 (year on year).

Bongwa Mthembu, senior analyst at Meago Asset Managers, says appetite for European logistics among large institutional investors has also rocketed, which has led to strong valuation uplifts and yield compression.

He refers to European logistics investment reaching a record €22.5bn during the first half of 2021, 60% up on the five-year average.

Wooler, who is keen to further bulk up IPF’s European footprint, reckons the decision to sell out of Australia and the UK to pursue European growth opportunities has allowed IPF to simplify its balance sheet and introduce a more focused offshore strategy. He hopes to double PEL’s portfolio value from the current €1.08bn to €2bn-€2.5bn within the next three to five years. About R1bn of noncore assets is currently for sale. The proceeds will be used to fund European acquisitions.

Wooler says there’s unprecedented demand from occupiers and investors alike, and e-commerce tailwinds will continue to boost rentals and valuations.

He adds: "Vacancies remain at record lows and it will probably take at least 12 to 24 months for new supply to catch up with demand."

But he does concede that the European logistics sector has become expensive on the back of the "wall of capital" that continues to drive prices up and yields down.

He notes that yields of prime logistics properties have come down by at least 100 basis points over the past 12 months alone and now sit around 3%-4% (projected annual income return as a percentage of market value), down from an average 5%-7% in 2015.

Wooler says while it has become difficult to compete with the large institutional investors when you’re buying at yields of 3.5%, there are smaller deals to be had at higher yields.

He believes PEL’s competitive advantage is that it has "boots on the ground" – a strong local, in-country management team with many years of experience in European logistics.

IPF is also looking at new development and extension opportunities that offer better returns than buying existing properties.

PEL already has a €41m pipeline including one new development in Poland and extensions of two properties in France at yields of 6%-7%.

IPF is the only JSE-listed company that provides SA investors with access to Western European logistics. The expectation is that its growing exposure to that market will translate into further capital growth and value unlock for shareholders over the next 12 to 24 months.

Mthembu notes that though IPF’s share price has recovered about 32% year to date, the stock is still trading at a sizable 30% discount to NAV. "We believe IPF offers good value at these levels," he says.