Investors show renewed interest in offshore property stocks

While South Africa-focused property counters have struggled to achieve their capital raising targets, investors have been bullish on offshore property companies through certain rights offers, which were oversubscribed in a matter of hours.

More than R11 billion in capital has been raised via private placements and rights issues so far this year by property companies on the JSE.

SA’s listed property sector has been the most active sector on the JSE in recent years, with R32 billion raised in 2016, R36 billion in 2015, R40 billion in 2014 and R18 billion in 2013.

The largest capital raises so far this year has been by Slovenia – and Portugal-focused Greenbay Properties, which raised R3.1 billion in two tranches between March and May. Other offshore counters that have received fervent support include Poland-focused Echo Polska Properties, Europe-focused MAS Real Estate, Investec Australia Property Fund and others (see the table below).

Source: Stanlib, Moneyweb

Analysts said the recent downgrades to SA’s credit rating, increasing economic and political uncertainty has resulted in investors allocating capital to offshore markets.

According to Keillen Ndlovu, head of listed property funds at Stanlib, growth prospects in offshore markets are better than in South Africa, where the retail sector has become saturated with limited development prospects and the office sector faces oversupply. “The situation is being worsened by slowing GDP growth,” Ndlovu said.

Anas Madhi, executive director at Meago Asset Managers, supports Ndlovu’s views, saying that recent company results by 100% SA-focused property companies indicate that property fundamentals particularly in office, industrial and retail sectors in the country are deteriorating.

“Hence, many South African companies continue to expand offshore, particularly within the dynamic Central and Eastern Europe region. We expect this trend to continue, despite the region attracting interest from investors globally.”

The flurry of property listings on the JSE over the last five years has given investors exposure to the UK, Australia, Central and Eastern Europe, without having to physically take their rands offshore.

Investors can now invest, via the JSE, in more than 15 property companies that are exposed to offshore markets. Ten years ago, the sector had no exposure to offshore markets and now nearly 40% of earnings are derived from markets outside SA.

It is becoming increasingly difficult for property companies to deliver inflation-beating dividend growth as tough economic conditions continue to bite. Analysts expect dividend growth for 2017 to be between 7% and 10%.

Offshore jitters 

Tough trading conditions have prompted local property companies to consider investment opportunities in Europe, Australia, the UK and rest of Africa. “In offshore markets, debt funding is cheaper relative to property yields, making it easier [and affordable] to make acquisitions. However, offshore markets are becoming more competitive,” said Ndlovu.

Going offshore, after all, brings a different set of risks such as currency fluctuations, which can impact rand-based earrings. For Madhi, the key concern is that local companies end up overpaying for property assets in offshore markets without the necessary local partnerships to manage investments.

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