The JSE’s potential move to lower index barriers for smaller-cap property companies could generate increased investment interest in SA’s emerging property subsectors, according to specialist real estate equity fund, Meago Asset Managers.
This comes as the JSE considers expanding its all property index (Alpi) following criticism of its methodology by various portfolio managers in the property sector.
Spear, Octodec investments, and Dipula income fund do not meet the index’s criteria due to liquidity issues or being too small, meaning fund managers are not required to invest in or focus on these stocks.
Meago views the potential listing of these companies on the Alpi as a strong incentive for smaller SA property companies to list on the JSE, as it would instantly attract the attention of institutional investors.
“Any investment in these companies have to date been considered as off-benchmark investments for benchmark cognisant fund managers. Their inclusion on the preferred benchmark [Alpi] places the onus on fund managers to actively consider investing in these companies. Meago has previously invested in several of these companies as we consider this quality high-yielding companies that were deeply discounted owing to their off-benchmark status,” Meago said.
According to Meago, smaller-cap companies such as Octodec, which were excluded from the Alpi, derive about 55% of their income from CBD residential and township retail assets. These sectors offer significant potential for solid returns, making them a valuable investment opportunity for SA investors.
Dipula CEO Izak Petersen said: “The exclusion of Dipula [from] the JSE all property index to date has been an anomaly for several years as Dipula was considered a fledgling company by JSE criteria. In order for Dipula to be considered for the JSE all property index previously it needed to qualify for the small cap index.”
Petersen added that the JSE’s entry criteria for the small cap index (and by extension, inclusion in the all share index), required the issuer (the company) to have a place in the top 98.5% of cumulative market cap on the JSE based on gross market cap before any liquidity or free float restrictions are taken into account.
“This was a significant obstacle as the top five companies on the JSE could easily account for more than 50% of the total JSE market cap (companies such as Naspers with a market-cap of R760bn are used in the calculation), thereby making it somewhat impossible for smaller companies to qualify for the small cap index (the threshold required would be approximately R6bn-7bn market cap on our calculations),” Peterson said
A Western Cape-focused Reit, Spear has experienced a significant rise in daily trading volumes over the past year as it edges closer to meeting the initial criteria for index inclusion, according to CEO Quintin Rossi.
“We believe that our investor universe will expand post index inclusion, which will have a positive effect on daily volumes and investor interest from fund managers who have an Alpi index mandate. We have recently been informed that FNB Wealth & Investments research team will initiate coverage on Spear in 2025, which is a further feather in our cap as investor demand for Spear increases,” Rossi said.
“Spear currently has 57% institutional investors, and we believe its potential inclusion in the index will attract more fund managers to add Spear to their portfolios. This will give them exposure to the Western Cape real-estate sector, leading to enhanced liquidity and growing investor interest in our Western Cape-focused Reit,” he said.
Petersen pointed out that having more Reits and exposure to more management teams was good for risk management and performance of the sector, as it allowed for diversification and stock picking opportunities for asset managers who invested in Reits.
Octodec deputy CEO Riaan Erasmus said the current methodology of the Alpi did not completely reflect the performance of property companies like Octodec, as most of the currently included property funds were investments that were geographically spread, be it in SA or globally. Therefore, the number of property companies that were reflective of the SA economy were low at present, Erasmus said.
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