Consolidation in the Listed Property Sector

Posted On Monday, 26 February 2007 02:00 Published by eProp Commercial Property News
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What does the future hold for PUTs?

Craig HallowesInvestors may well be questioning whether consolidation in the listed property sector will leave any Property Unit trusts (PUTs) and Property Loan Stock (PLS) companies on the JSE. Of the 35 listed property entities, at least four are currently the subject of corporate action and there is potential for considerably more consolidation during 2007.

This is taking place in both the PLS sector, such as Growthpoint Properties buying out the Paramount Property Fund in a R3-billion deal and Redefine Income Fund acquiring Spearhead Property Holdings in a deal valued at R1,3-billion, as well as in the PUT sector where several deals have been announced.

One of the pending transactions is the SA Corporate Real Estate Fund (previously the Marriott Property Fund) bid for SA Retail Properties. If successful, this would create a listed property entity with a market capitalisation of some R5-billion, making it the second largest PUT, after Grayprop. This follows SA Retail’s purchase of Sharemax Investments (Pty) Ltd last year.

Other consolidation in the pipeline includes the offer which Emira Property Fund has made to buy Freestone Property Fund for R223-million and MICC Property Income Fund is to be absorbed into Vukile Property Fund. Pangbourne Properties has acquired a controlling stake in Calulo Property Fund and could merge the two funds.  And this trend is likely to continue.

Allan Gray Property Trust Management Ltd, the management company of Grayprop, has effectively hung a “for sale” sign on the PUT after announcing that the controlling shareholder had been approached about selling its stake in the trust. Madison Property Fund Managers, which manages ApexHi Properties, Hyprop Investments and Redefine Income Fund, has confirmed that it is in talks with Allan Gray and seems the likely frontrunner at this stage.  But there are three other potential suitors, which would have the capacity to acquire Grayprop: Growthpoint, managed by Investec property group; Sycom (Attfund); SA Corp (Old Mutual's listed property arm).

“By the end of the year we could see the number of listed counters dwindling to approximately 20,” comments Michael Levin, a senior investment manager at Cannon Asset Managers. “There is the potential for some of the listed property companies, who have similar portfolio mixes, strategies and like-minded management, to be merged and it is likely that Grayprop would be absorbed into one of the other listed entities following a successful purchase.”

“The key thing for investors to note,” adds Craig Hallowes, spokesperson for the Association of Property Unit Trusts, “is that the consolidation is extremely positive for the industry. Fewer, but larger, entities will boost liquidity in the sector as well as raise market capitalisation of stocks.” Some of the counters suffer from being especially tightly held. SA Retail, for example, was so tightly held by a limited number of unit holders, that it was recently removed from the South African Listed Property Index (SAPY).

As Levin points out, better liquidity and higher market capitalisations will make listed property more attractive to both domestic and institutional investors. If, for example, a foreign fund manager wanted to allocate a prudent amount of their portfolio to SA property, they would struggle to fill this allocation with suitable assets, whether direct property or listed.

“Furthermore, a key ingredient to any property fund is the number of first-class assets with attractive yields and currently these premium assets are distributed among the host of property counters currently listed. It will certainly be in the sector’s best interests to see further consolidation take place,” concludes Levin.

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