Finance Week

By Joan Muller
Senior writer
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INVESTORS continue to pour millions into high-yielding listed property funds despite a growing perception that the sector has become expensive: share prices have increased on average 30%/year over the past three years. Investment via unit trusts into listed property alone has nearly tripled over the past year from R420m (net) in first quarter 2004 to R1,1bn in first quarter 2005, according to the latest figures reported by the Association of Collective Investments (ACI).

Income-seeking investors’ growing appetite for listed property has prompted institutions and private property companies to assemble new property portfolios for listing as existing funds struggle to meet demand.

That should see the market cap of the JSE Securities Exchange’s property unit trusts and property loan stock sectors increase further over the coming months. Both sectors’ combined market cap is already approaching R40bn, up from roughly R8bn three years ago.

Latest additions to the sector are Pangbourne’s retail fund Siyathenga and the Grapnel Property Group’s hotel fund Hospitality. Both funds will be listed, in August and October respectively. Other new funds – mainly black empowerment ventures – are expected to follow suit later this year or early in 2006.

Hospitality will be the JSE’s first property fund to invest exclusively in hotels. Grapnel MD Gerald Nelson says that though it’s still assembling the portfolio, Hospitality should have an initial asset value of between R1,5bn and R2bn.

It will include a number of three- to five-star hotels, with the focus predominantly on the mid sector of the market, which is currently achieving higher occupancies and income levels than the market’s luxury end.

Nelson argues that while there’s a huge shortage of quality retail, industrial and office stock to form new listed funds, the hotel market is still fairly untapped. So unlike retail property, for example, hotels aren’t yet fully priced. That will enable them to offer investors a higher income yield than the average 9% currently available in the sector.

Nelson says that together with other industry players, the sector’s focus will increasingly shift from diversification to specialisation. At the moment there are only two out of 26 listed funds that invest solely in one particular sector: Metboard (industrial properties) and SA Retail (retail properties).

Catalyst Securities MD André Stadler says that until recently size and diversification mattered most in the listed property sector. So diversifying – in terms of sectoral and geographic spread – and growing market cap were key in the ongoing bid to improve liquidity.

However, now that so many funds have breached the R1bn market cap level, new entrants will need to find other ways to differentiate themselves. Stadler says that the only way to offer some sort of differentiation is to become more focused.

Property review Rode’s Report editor Garth Johnson says that the SA market will follow the international trend with a growing focus on non-traditional commercial sectors, such as hotels, hospitals and healthcare and State-owned property.

Johnson says that the SA market could even see a few residential property funds going the listing route, such as the proposed Habitat fund, which was considered for listing a few years ago by Catalyst Property Asset Management. The listing, which would have been the JSE’s first outright residential property fund, didn’t materialise.

However, Johnson and Stadler agree that residential property funds are unlikely to see the light of day any time soon because residential property prices have already peaked and average rental yields languish at around 5% to 6% – a level that can’t compete with the current average yield of 9% offered by commercial property funds.

But analysts agree that niche funds could initially be perceived to be a riskier option for investors than established, diversified funds. Stadler says that one of the problems faced by specialist funds – particularly those investing in non-traditional sectors – is that there’s no existing benchmark for comparison.

He argues that niche funds will probably have to offer investors a substantial yield premium to discount any perceived risk. Funds that invest in non-traditional properties where a high portion of their income is not fixed could also battle to lure investors.

Stadler says that may be the case with Grapnel’s hotel fund if its income stream is mostly dependent on market variables, such as occupancies. However, at this stage it’s not clear how leases with hotel management groups will be structured, he says.

Size also remains a factor, and specialist funds that don’t have critical mass may find it difficult to compete with larger, diversified ones. Stadler says that funds with market caps of below R500m simply won’t attract investors on a large scale.