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Listed property tempts private equity

Posted On Thursday, 07 June 2007 02:00 Published by eProp Commercial Property News
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Listed property companies run the same risk of takeover as listed non-property companies

Angelique de RauvilleConsolidation and private equity takeover deals are a global trend and listed property companies run the same risk of takeover as listed non-property companies.

Fund managers who invest in the listed property sector would understandably not be keen on private equity takeovers because such transactions would lead to delistings and a further reduction in the already limited choice of listed property investments.

While not a private equity transaction, the announcement in March that the Public Investment Corporation (PIC) was making a takeover bid for listed property loan stock company CBS Property Portfolio, caused some mutterings from fund managers, who were less than thrilled at the prospect of a possible delisting.

It is understood the PIC would delist CBS and absorb its portfolio if the bid was successful.

Private equity deals are another thing altogether but could have the same end result.

Angelique de Rauville, MD of Investec Listed Property Investments, says consolidation and private equity deals are "part of a global trend" with South African listed property "being no exception".

De Rauville says private equity deals benefit investors in the short term as private equity players generally pay a premium to the share price in order for the bid to be accepted and the company delisted.

She says the listed property sector is small, with only 27 stocks listed with a total market capitalisation of R104bn.

Private equity transactions cut the number of listings further.

"That doesn't improve the appeal of the sector to international investors and it makes local asset managers' responsibility of outperforming the benchmark increasingly difficult as the universe of stocks and size of the sector diminishes," says De Rauville.

She says that on certain stocks there is a high probability of a takeover from a private equity player, particularly those stocks with low levels of borrowings.

De Rauville says the stocks that are a target for private equity players could be small market capitalisation stocks or large ones.

"You could have an aggressive international player like Macquarie Bank coming into the sector and making a bid for one of the larger cap stocks."

She says smaller market capitalisation stocks that are tightly held by key individuals could also be the subject of private equity activity.

"Fund managers would not be pleased with private equity takeovers unless they changed their investment mandate to include a broader range of property equities beyond local property equities."

Norbert Sasse, CEO of Growthpoint Properties, the largest listed property company with a market capitalisation of more than R17bn and property assets worth R20bn, says the risk of listed property companies "potentially being bought out by private equity firms is no different to the risk of any listed company at the moment".

But Sasse says he believes the one issue private equity investors would battle to come to terms with is the huge premium that SA's listed property companies are trading at relative to net asset value.

"In the South African context, investors are focused more on yield than NAV (net asset value), whereas internationally a lot of those investors are quite focused on NAV," he says.

Sasse says foreign private equity players may like the yields the listed property sector offers but might be ?turned off? by the huge premium to net asset value.

He says the listed property sector is trading on average between 6,5% and 7,5% on a forward yield basis.

Len van Niekerk, head of quoted property at the Old Mutual Investment Group, says he does not believe net asset value would be "such an issue for a private equity player".

Van Niekerk says historic property values are generally below market and a private equity player would look at the listed property vehicle's yield and income growth.

"I think there is always a possibility that there would be an approach or offer from private equity players."

But he says it is also more likely the private equity player would be more interested in a large listed property company, such as a Growthpoint.

"I don't see them being interested in small or mid-cap property stocks. They would simply be too small."

But local fund managers could also be a thorn in the side of a private equity deal maker.

Van Niekerk says local fund managers, who are invested in listed property stocks, could be faced with a dilemma if they received an attractive cash offer for the units they hold in listed property because of a lack of alternative investment opportunities. "The risk is that they (fund managers) sit with a lot of cash and they then may have to invest back into the listed property sector."

Of particular concern is that fund managers who are mandated to invest only in listed property could create artificial inflationary pressure on listed property stocks by them all "chasing" the same stock to reinvest their cash.

This could ultimately result in the listed property sector losing value because "you can't chase the share prices forever", says Van Niekerk.

Because of this, some fund managers could also "put the brakes" on a potential equity takeover of a local listed property company.

"For a private equity takeover to be attractive for a local fund manager, the private player would have to offer a yield comparable to international levels for a large local property company, maybe 3%," he says.

The price would therefore have be almost ridiculously high .

Last modified on Thursday, 24 April 2014 13:43

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