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Predators are loose

Posted On Monday, 18 April 2005 02:00 Published by eProp Commercial Property News
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Big funds red in tooth and claw have appetite and muscle to swallow their peers

Des de Beer ResilientHyprop's bid for fellow property loan stock company SA Retail could be the start of hostile takeovers and defensive mergers in the sector. 

Hyprop can enhance its top-rated 7,4% historic yield by taking over almost any of its peers (SA Retail's yield is 8,4%).

Some of the other big funds have similar muscle. They are small by international standards and want to grow bigger. In the late 1980s and early 1990s, low interest rates, re rating and yield gaps gave them the opportunity to do this. 

"But the Hyprop bid signals a predatory departure from the friendly merging of stablemates in those days, and SA Retail makes a classic prey," says David Green, MD of Pace property brokers and a former listed fund manager. 

Hyprop is one of the new, energetically managed (jointly by Standard Bank Properties, Corovest and Madison), transparent and investor-friendly funds. SA Retail, managed by Marriott, represents a more gentlemanly, opaque approach to investment (see next story).  "At a market cap of R2,6bn, Hyprop is big and liquid," notes Green.

"Its properties are top quality, its management well-rated and payouts are growing fast. This could be attractive to SA Retail shareholders by taking Hyprop paper for their holdings."  SA Retail is not the perfect buy for Hyprop. Many of its properties are much smaller, but about 56% of the portfolio could fit - including East Rand Galleria (worth R240m), Musgrave (R200m), Sanlam Centre Pinetown (R106m), Eikestad Mall Stellenbosch (R106m) and Springfield Value Centre (R100m).  Hyprop will probably keep SA Retail at arm's length as a separate listed entity, set Hyprop management loose on it to enhance its rating, and clean out the low-grade stock. 

Listed funds are currently valued at an average 20% premium to the value of their underlying properties.  This window of opportunity is likely to disappear soon in the frenzied rush by listed and unlisted investors to buy into the commercial and industrial property market.

Property has been in decline for 30 years and there is a shortage of good investment properties available.  It's much easier for highly rated funds to feast on their smaller peers than to compete with the rabble for directly owned properties. Management is what separates predator from prey.

"It all boils down to performance," says independent property analyst Liliane Barnard.  One problem in the property jungle is that the obvious prey are scattered and few. Of 29 listed funds, 15 are potential prey. But only Ambit, Martprop, Metboard and SA Retail seem to be obvious targets with broad ownership. Paraprop could join them if major shareholder Absa will sell. 

The recent death of Atlas's biggest shareholder, Peter Irvine, could leave it exposed, unless management has pre-emptive buying rights to his holdings. Acucap is vulnerable, but management and Resilient probably control enough of it to ward off any attack.

Capital is well held by Old Mutual and Resilient, and with its black empowerment credentials under Cyril Ramaphosa, could very well turn predator. 

Emira is 48%-held by Momentum Life, which would want to help preserve RMB Property's fees. iFour is controlled by Pangbourne, itself a predator; Miccprop and Vukile are controlled by Sanlam.  "But," says Madison director Marc Wainer, "better liquidity and performance can appeal strongly to institutional owners."  Resilient CEO Des de Beer agrees.

"We are custodians of public money through our holdings in Capital and Acucap. If the right offer comes, we'll take it. Meanwhile, Resilient has little trouble growing by enlarging its property portfolio because we specialise in regional capitals and smaller cities. Acucap is in a more difficult space." 

Main protection for the hunted will come from growing bigger and improving performance. Octodec and Premium have good management in the Wapnick family. But they could seek further protection by merging. SA Retail is trying to head off Hyprop by, along with Martprop, cross-selling shares in their properties. 

The predators are few, mainly because two of the biggest funds - property unit trusts Grayprop and Sycom - are the sector's equivalent of large herbivores. They are unlikely to enter the fray but are relatively safe from takeover. 

Growthpoint, at an 8,7% yield, is not rated highly enough to have the wide choice of Hyprop. Pangbourne (9,4%) has a single target in Martprop, but financial director Craig Hutchinson says the company is not yet in its sights. So that leaves ApexHi, Hyprop and Redefine, all in the Madison stable, along with Resilient, as the main predators.

Last modified on Saturday, 10 May 2014 09:54

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