Although  last year was punitive for equity investors as the JSE all share Index fell by 23%, for listed property stock investors the year was not as harsh, with the South African listed property index recording a negative total return of 4,47%, says Norbert Sasse, Growthpoint CEO and chairman of the Property Loan Stock Association.

It was the first time in the past five years that the South African listed property index recorded a negative total return, having shown a record return of 50% in 2005. Performance was hit by general drivers such as capital markets’ volatility and increased investor risk-aversion, rather than by property-specific concerns. While the sector did outperform equities, it underperformed both bonds (17% return) and cash (12% return).

Amid this slight decline for the sector, Growthpoint Properties’ market performance resisted the downward trend and ended last year 5,25% up for the period. Growthpoint is the largest South African listed loan stock by market capitalisation and assets, with a market cap of R19bn at the close of last year, putting it into the JSE Alsi 40 index and the MSCI emerging market index.

The South African listed property performance over the past year looks even more appealing when one considers what happened to listed property stocks in the UK and US, where declines have averaged 40%.

Australia fared even worse as the sector fell by 60%, and if the biggest player, the Westfield Group, is excluded from this number, the sector plunge is about 80%.

By comparison, South African listed loan-stock investors were relatively unscathed by the market fallout.

During these tough global conditions Growthpoint went ahead with a R1,742bn rights offer to its existing linked unit holders. This offer closed on Friday January 23 with most shareholders following their rights.

Sasse says it was a phenomenal achievement to have raised this funding in a period when international markets are crashing.

“Our rights offer has truly bucked the global trend. If one looks at listed property stocks in the UK and Australia, many of them proceeded with rights offers to shareholders but these were not to raise funds for future capital expansion. They were compelled to do this merely to survive the present crisis. It was impossible for them to raise funds on the capital markets and they had to go to shareholders for cash. The issue prices of these rights offers are heavily discounted to current share prices, which are already sitting at discounts of up to 60% of net asset value.”

He says recent statistics show that Australian property loan stock companies have had to look to shareholders for funding at heavily discounted levels —rights offers are being priced at average discounts of 11% to recent share prices, 32% discounts to 30-day weighted average share price, and more than a 40% discount to 60-day and 90-day weighted average prices.

The Growthpoint rights offer was at a price of R13,60, a 2,3% discount to the 30-day volume-weighted average.

Sasse says that funds raised from this transaction will be put to a variety of uses.

“Immediately, we would place these funds in short-term cash investments where interest rates on offer are marginally enhancing at this point. However, we will then use these funds in an effective way to refinance and restructure our debt profile, optimising our cost of capital and in turn enhancing returns to linked unit holders. This is one of the biggest risks facing listed property stocks at the moment — how to refinance their debts. It is absolutely crucial that they do not get caught short when these loans come up for settlement.”

Sasse says that alternative financing methods such as debt securitisation are not realistic at this time.

“The global commercial mortgage backed securities market is effectively closed and although SA has not retreated to this extent there is no real liquidity at present.

“With regard to cash returns to unit holders — property loan stocks distribute all income back to investors —the South African listed property sector’s distribution growth rate was about 12% for last year. While this growth rate is expected to come down, as rentals have peaked and escalation clauses will soften, the 2009 distribution growth rate for linked unit holders is expected to be about 10%. A positive growth trend remains in place, in sharp contrast to financial services companies, where the trend is flat and some are even posting losses.”

He says Growthpoint is the only listed property loan stock company in SA where all aspects of management remain in-house. Other companies outsource various aspects of portfolio management to varying degrees.

Sasse says Growthpoint’s model more closely aligns the interests of management with those of all shareholders — every Growthpoint employee is a shareholder —and it remains a key pillar of their operating model.