Property funds: Spoilt for choice
More and more niche funds are coming to market.
Getting exposure to property is no longer only about picking any number of the more traditional, or vanilla diversified funds listed on the JSE; with portfolios spanning retail, office and industrial assets your choices can be as niched as you prefer. In recent years, investors have seen a greater degree of specialisation, with a number of real estate investment trusts (Reits) or funds with very specific portfolios coming to the market.
Funds offering exposure to Eastern Europe (and Australia) have been particularly popular among local investors, and many of the large-cap funds have acquired and then spun off portfolios of assets (or interests) in these regions. But, a growing number of smaller, more targeted funds have also listed.
This trend towards specialisation was inevitable; especially given the make-up of more mature markets elsewhere.
However “scale and liquidity have been key setbacks of the SA listed property sector and we believe management teams and investors prefer size and liquidity to specialisation,” says Kundayi Munzara, director and portfolio manager at property-focused Sesfikile Capital. “There has been a limited push from investors for greater levels of specialisation.”
Kundayi Munzara: Management teams and investors prefer size and liquidity to specialisation.
However, Munzara believes “the South African real estate market is large and deep enough to require specialisation and with a sizable asset base, sufficient asset and tenant specific diversification can be achieved”.
Local investors are increasingly able to get specific exposure to specialised property through a variety of counters on the JSE. Of the three dozen Reits on the market, a handful offer niche exposure and a further handful offer exposure to overseas markets. In the Real Estate Holding and Development sector, most of the companies in the sector offer offshore exposure.
Stor-Age Property Reit, which listed in 2015, is arguably the first highly-specialised fund to come to the market. Stor-Age is the country’s largest self-storage property fund and, in its roadshow to investors ahead of listing, it argued that it offers a “niche asset class uncorrelated to traditional drivers of property”.
Stor-Age Property Reit was one of the first specialised funds.
An advantage of Stor-Age is that it is uncorrelated to traditional property drivers.
Indluplace was the first listed fund to focus exclusively on residential property assets.
Indluplace, listed by Arrowhead Properties in 2015, was the first listed fund to focus exclusively on residential property assets. As at the end of March 2018, it had a portfolio of nearly 10 000 units across 171 properties, mainly in Gauteng.
The smaller Transcend Residential Property Fund listed in late 2016 and has approximately 2 500 units in its portfolio.
Diversified funds, SA Corporate and Octodec Investments, both have sizeable residential portfolios in Gauteng. Balwin Properties also plays in the residential space, but is a pure-play developer. However, it recently announced plans to list a residential Reit on the JSE.
Exemplar Reit is the most recent specialised listing. Founded and brought to market by the McCormick family, its portfolio of 20 shopping mall assets are based only in “under-serviced, peri-urban townships and rural areas”.
But bringing specialised assets to the market is not as simple as it would seem. Inkunzi Student Housing pulled the plug on its anticipated listing earlier this year because conditions were no longer favourable.
Aside from those funds with assets in markets like Eastern Europe, the UK and Australia (and Grit Real Estate which is the only Africa-specific fund on the JSE), there are two smaller funds offering specific exposure to a region in South Africa.
Both Spear Reit Limited and Ingenuity Properties are focused exclusively on the Western Cape. Ingenuity’s portfolio is worth R4.7 billion, while Spear Reit’s is worth R3.1 billion. Together, they own more than 60 properties in the province, primarily in the Cape Town metropole. Examples of well-known properties owned by the two funds include the 15 on Orange and Upper Eastside hotels, Great Westerford in Newlands, Newspaper House on St Georges Mall and the Santam head offices at Tyger Valley. Spear Reit forecasts distribution growth in FY19 of between 9% and 11%.
Some funds, notably Spear Reit Limited and Ingenuity Properties, have focused on the Western Cape market.
Munzara says the specialised counters on the JSE “are typically run by more hands-on management teams that have an intimate knowledge of their assets and tenants”. Examples are the McCormick’s at Exemplar and the teams at both Spear and Ingenuity.
“While the small-cap specialised counters have shown greater volatility than larger cap names, the mid-cap specialised counters have shown comparable or low share price volatility.”
Even so, “over the last two years these counters have significantly outperformed the index and larger diversified JSE listed property companies”.
At the same time the larger counters continue with their asset management activities. Hospitality Property Fund, which in July acquired seven casino precincts (including hotels) worth R23 billion from parent Tsogo Sun, now looks completely different to the company it was a year ago. It is the only specialised Reit on the local bourse focused entirely on the hospitality sector, and now offers more widespread exposure to the overall sector (versus what was previously only a hotel portfolio).
The Radisson Blue is one of Hospitality Property Fund's assets.
Hospitals offer investors long-term yields.
The newest specialised fund on the market is not yet listed. In June, Growthpoint launched the country’s first unlisted healthcare Reit, which already holds a portfolio of five hospital assets worth R2.4 billion. This is a small part of Growthpoint’s overall, diversified portfolio, which is valued in excess of R127 billion.
“Investors, particularly pension funds have shown an initial keen interest in the investment opportunity as it provides them with the ability to match their long-term liabilities with long-dated assets,” says George Muchanya, head of Corporate Finance at Growthpoint. He says the sector is distinguished by quality covenants from healthcare operators with licences linked to their operating addresses.
It is also characterised by long leases and the portfolio has a weighted average lease expiry period of nine years.
Growthpoint aims to grow the healthcare fund to “R10 billion in assets” and then list it on the JSE.
Property has historically been a stellar performer on the JSE, but growth has slowed as the economy has stuttered. Investors are now increasingly able to pick and choose their portfolio focus as they search out better performance in selected niches.■