Listed property in cul-de-sac

Posted On Wednesday, 12 March 2008 02:00 Published by eProp Commercial Property News
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Although there is likely to be corporate activity in the form of mergers, even they will be affected by the pricing of units

Ian AndersonAs far as the acquisition of fixed properties is concerned, the listed property sector looks set for a quiet year as the volatility in unit prices and the increasing cost of debt make the funding of acquisitions more difficult.

Although there is likely to be corporate activity in the form of mergers, even they will be affected by the pricing of units.

Ian Anderson, portfolio manager at Fortress Asset Managers, says that globally, markets have seen a substantial increase in the cost of capital of listed property companies.

“Not only have interest rates and credit spreads increased, but with market prices having fallen substantially over the past year, funding through the issue of new equity capital is now also very expensive. SA is no exception.”

He says official interest rates have risen 400 basis points since June 2006 and market prices of South African listed property securities are on average 20% lower than last year’s November highs.

“Coupled with strong income growth, the yield on SA’s listed property sector is now 150 basis points higher than in November last year.

“As a result, funding property acquisitions through debt or issuing more equity is becoming increasingly difficult for all but the most highly rated (that is, lower-yielding) listed property companies such as Hyprop Investments and Resilient Property Income Fund.”

Anderson says only six companies in the listed property sector are trading on forward yields below 8% and nine companies are trading on forward yields above 9%, including Fountainhead and SA Corporate Real Estate Fund, two of the largest funds in the listed property sector.

He says a look at recent transactions in the sector suggests yields on good quality retail, commercial and industrial properties vary between 7% and 9%, while, for instance, Hyprop’s shopping centre portfolio — which includes Canal Walk Shopping Centre — was valued in December on a historic income yield of 5,7%.

“At these low yields and with the prices of listed property securities where they are right now, we are unlikely to see a significant number of property transactions this year.”

Management teams appear to be focusing on opportunities within the sector and Anderson expects further consolidation, with a number of companies trading under cautionary announcements relating to merger and acquisition activity.

Marc Wainer, executive director of listed property asset managers Madison Property Fund Managers, which manages Hyprop, ApexHi Properties and Redefine Income Fund, confirms there is a lot volatility in the listed property sector.

There is not “as much demand” from investors for “paper” as there was, he says.

“If we, for instance, wanted to do a property acquisition and we wanted to issue units, we would have to set the price in advance and make sure we could place the paper at that price,” Wainer says.

Because of the volatility in unit prices it is more challenging to determine a price and actually place the units.

“Last year, when the market was stable and there was much more demand for paper, a property company could go to three or four institutions and you could raise R1bn quite easily.”

He says most property companies are “under-geared” but are still finding it “very hard to make anything work at current levels using conventional debt” because of the diluting effect on earnings.

Wainer says there is much more property stock coming onto the market but the pricing is unrealistically high.

“I think we will see some sellers who are squeezed and more realistic prices will prevail. There will be opportunities, but it will take some time.”

Andre Stadler, MD of Catalyst Fund Managers, says while the listed property sector has experienced an increase in yields and therefore a drop off in unit prices, the physical property market has not yet adjusted itself. This is making it difficult to fund acquisitions in the direct market.

Stadler says he is expecting few property acquisitions from the sector, but with interest rates moving upwards, the market could see “distressed” sellers in the physical property market. This could provide opportunities for listed property companies.

“In the interim, the only activity that is likely to take place is corporate activity in the sector.”

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