The listed property sector is the most active on the JSE, with mergers and acquisitions dating as far back as ten years ago.
“The past decade has been an exceptional one for listed real estate in South Africa both in absolute terms as well as relative to other asset classes,” explains portfolio manager of the Investec Property Equity Fund Neil Stuart-Findlay.
Stanlib head of listed property funds Keillen Ndlovu agrees: “The market capitalisation has grown over ten times over the last ten years.”
Tower Property Fund, Accelerate Property Fund, Visual International Holdings, Attacq Property Fund and Equites Property Fund are just some of the counters which have debuted on the JSE.
Stuart-Findlay says beyond 2014 more development and residential focused funds might list. “We are supportive of new listings that bring alternative investment strategies and hence greater investment choice to the sector.”
The sector is poised for further consolidation with some of the new entrants becoming take-over targets.
Sesfikile Capital director Evan Jankelowitz says consolidation indications are part of a property cycle, as the number of listed property companies expand and contract through cycles.
“What typically happens is that larger, more liquid companies achieve a better rating than smaller, less liquid ones and this provides opportunities to ‘bootstrap’ earnings – in effect buying higher yielding companies by issuing lower yielding shares,” Jankelowitz explains.
In boom times the prices of physical assets become expensive, leading to larger funds having a competitive edge to raise money cheaply. “Smaller funds don’t necessarily enjoy this benefit,” he says.
Fresh speculation of consolidation was spurred by Redefine Properties’ 11% bid for Emira Property Fund worth over R800 million – effectively making Redefine the biggest shareholder in Emira.
Also, Octodec Investments (Octodec) and Premium Properties (Premium) facilitated a long-touted merger.
Other deals which point to the trimming down of the sector includes Arrowhead Properties bid for a 31.7% stake in Vividend Income Fund, the recent collapse in talks by Vukile Property Fund to acquire a 34.5% stake in Synergy Income Fund and the failed tripartite merger of Rebosis Property Fund, Delta Property Fund and Ascension properties.
More deals may be on the cards, says Jankelowitz, but in some cases corporate action is questionable.
“We are not supportive of a ‘bigger is better’ view with regard to consolidation – there needs to be a sound strategic rationale which will lead to enhanced shareholder returns for the deal to make sense.”