There is little appetite to invest in local commercial property, with all of the equity raises in the listed real estate sector having been done to fund offshore acquisitions so far in 2019.
The disappointing performance of the all property index, which includes all real estate companies listed in SA, is causing investors to lose confidence in the local asset class.
The JSE all property index suffered a loss of 1.54% in the first three quarters of 2019, while equities returned 7.08%.
The FTSE/JSE SA listed property index (Sapy), which includes the top 20 liquid real estate companies by market capitalisation, also shows how disappointing 2019 has been for the sector. It has achieved a total return of 1.34% year to date, inclusive of capital growth and dividends.
There were hopes that the index would bounce back after having suffered a total loss of 25.26% in 2018.
This was the sector's worst year in more than two decades, fuelled by a sell-off in the shares of the Resilient stable of companies which saw more than R100bn of the market value of Resilient, Fortress, Lighthouse Capital and Nepi Rockcastle wiped out.
Some asset managers released reports in which they alleged that the companies were overvalued and that related party deals were used to boost profits and share prices. Three of the companies have been cleared by the Financial Sector Conduct Authority of any wrongdoing.
The only investigation that still continues is into false and misleading statements of financial information by and about Resilient.
All interest in commercial property among JSE investors was in companies which had invested abroad.
“South African commercial property is in a bad phase and it seems investors are waiting it out. We have seen no local equity raises and bookbuilds this year,” Keillen Ndlovu, head of listed property funds at Stanlib, said.
This was in sharp contrast to a decade ago when most of the activity was around local property.
“Ten to 12 years ago there was virtually no offshore property exposure,” he said.
An accelerated bookbuild is a form of offering in the equity capital markets. It involves offering shares in a short time period with little to no marketing. The bookbuild of the offering is done quickly, in one or two days. Underwriters may sometimes guarantee a minimum price and sale proceeds to the firm.
In 2019 bookbuilds have been undertaken by Vukile Property Fund, which is investing in Spanish shopping centres; Nepi Rockcastle, which is the largest shopping mall owner in Eastern Europe; Investec Australia Property Fund, which owns a range of property in Australia; and Equites Property Fund, which is buying and developing industrial warehouses in the UK.
While more SA-based companies may look to raise capital for offshore expansion, there is also a possibility of more offshore groups listing in SA, according to Craig Smith, head of research at Anchor Stockbrokers. About 42% of the listed property sector is made up of offshore investments.
“It’s a possibility given that there is appetite for offshore exposure. It will depend on the platform, management team, track record, type and quality of portfolio and the view by these platforms as to whether SA capital is sufficiently enabling for them to grow their businesses,” Smith said.
But specialist local funds might still raise capital.
“I think there may be appetite for exposure to specialist real estate investment trusts (Reits) with high growth prospects. Therefore there may be opportunities for such Reits to raise equity capital in our market,” said Ryan Eichstadt, head of research at Meago Asset Managers.
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