Four real estate stocks are expected to be added to the 20 all property index (Alpi) constituents if a JSE proposal to lower the market cap threshold for index inclusion is implemented.
Counters set to join the Alpi in March are Dipula Income Fund, Octodec Investments, Spear Reit and Schroder European Real Estate Investment Trust.
The Alpi is the go-to real estate benchmark tracked by larger fund managers, which typically only take positions in index participants. Of the JSE’s 38 property counters, 18 are excluded from the Alpi.
The proposed changes to Alpi eligibility come after several fund managers lobbied the JSE to find ways to broaden the bourse’s investable universe of real estate stocks.
Meago Asset Managers director Anas Madhi says the Alpi has shrunk notably in recent years on the back of declining share prices and consolidation among peers — from 33 constituents at its launch in 2017 to 20 today.
“It has become quite restrictive for fund managers in terms of choice,” he says.
At the same time, the index weighting of large stocks such as Nepi Rockcastle and Growthpoint Properties increased significantly, creating more and more concentration risk.
Madhi says the market caps of several smaller companies have dwindled since the pandemic, making it virtually impossible to qualify for Alpi inclusion in terms of size requirements.
He says Alpi inclusion has ultimately been delinked from the property universe as it is first dependent on qualifying for the JSE’s small-cap index, which has a market cap requirement of about R7bn.
Madhi believes that’s unfair. “Property is a unique asset class and companies that have built a solid track record over many years, some in niche subsectors, should not be penalised for not meeting the small-cap index threshold.”
He adds that eligibility for Alpi inclusion should be less focused on size, and more on free float and liquidity considerations.
“This would encourage more niche property players in subsectors, such as student accommodation and health care, access to equity markets.”
The Alpi’s expansion will benefit institutional and retail investors, as stocks in the index become naturally more tradable and liquid.
Madhi says the move is also good news from a corporate governance perspective, as the shareholder base of new index participants will be broadened.
Moreover, the timing of the four stocks’ entry into the Alpi is opportune given the sector’s recent rebound thanks to improved post-election sentiment and lower interest rates.
Share prices of real estate investment trusts (Reits), which have been largely out of favour for the past five to seven years, have recovered strongly, with the Alpi up about 50% since end-October last year.
Still, there’s been quite a divergence in the performance of individual counters. Madhi says smaller and midsized property stocks — especially those that aren’t part of the Alpi — have lagged their larger peers.
“We believe there’s still a lot of value sitting in smaller caps, with plenty of value-unlock potential among those that will be included in the Alpi next year.”
That’s unfair, especially for companies that have built a solid track record over many years
— Anas Madhi
The four new Alpi entrants will contribute a combined benchmark weighting of about 2.8%. Izak Petersen, CEO of Dipula, which is the largest of the Alpi’s new constituents with a market cap of R4.7bn, has welcomed the JSE’s proposal.
He says Dipula ticks all the boxes in terms of free float and liquidity — just not on market cap. “Yet some counters that no longer comply with the JSE’s size threshold haven’t fallen out of the index.”
Petersen believes Dipula isn’t really benefiting from increased investor interest in the Reit sector because it’s excluded from the Alpi.
So Alpi inclusion will place Dipula on the radar of fund managers whose mandates preclude them from investing in stocks that fall out of the index, he says.
Dipula’s weighting in the Alpi will be 1.45%, which, Petersen says, is not insubstantial.
It is also likely that some fund managers may take an overweight position given that Dipula’s earnings performance outlook is “comparable or better” than that of many of its peers, he says.
Petersen expects distributable earnings growth of at least 5% for the year to end-August.
Incidentally, Dipula’s weighting in the Alpi will be larger than three existing Alpi constituents — Shaftesbury Capital, Primary Health Properties and Emira Property Fund.
In a circular to market participants, the JSE says the proposed methodology aims to delink the Alpi’s eligibility criteria from the broader all share index (Alsi).
Under the new proposal, property constituents of the JSE’s fledgling index that are excluded from the Alsi would qualify for the Alpi from March — provided they pass the free float and liquidity requirements.
The circular reads: “Mandates that exclude off-benchmark allocations have become restrictive for efficient access to this sector, since several property companies outside the Alsi universe are nonetheless potential asset allocations for bespoke property funds.”
The JSE adds that the proposed changes for Alpi eligibility will result in a 20% increase in the number of constituents.
“This will provide increased flexibility to portfolio construction. At the same time, more listed property companies would gain access to index-based investors, which may bring second-round benefits to the industry.”
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