Offshore property counters tap eager market for capital

Offshore property stocks have had a strong run over the past year and continue to stake their dominance in SA’s listed property sector.

Rand hedge property stocks have outperformed their local peers, as income-chasing investors hedging their bets offshore were rewarded with better returns. The appetite for listed property in recent years has remained strong with many investors backing capital raises.

Figures from Grindrod Asset Management show that in 2015, listed property companies raised in excess of R35 billion from a record-breaking R40 billion in 2014. And more offshore property companies are looking to build scale and liquidity.

London Stock Exchange listed-Redefine International is looking to raise up to £150 million (R3.5 billion) to fully fund its recent acquisition of properties worth £490 million (R11 billion) from Aegon UK Property Fund.

Redefine International CEO Mike Watters, says bank debt will also be used to settle the remainder of the deal comprising of 18 retail and office properties. Watters expects the capital raising to be at a small discount to current market prices.

“We have built a portfolio that has upgraded the quality of our overall company. It’s not the best time to be raising capital. Our share is very cheap at the moment because the market has been expecting us to raise capital,” Watters tells Moneyweb.

The game-changing deal will boost Redefine International’s property portfolio value to £1.5 billion (R35 billion), with a significant retail sector exposure.

Investec Australia and Atlantic Leaf

Investec Australia Property Fund is looking to raise R690 million by issuing 59.5 million shares at R11.58 – a 13.8% discount from Thursday’s close of R13.18. The proceeds from the raise will be used to reduce its gearing to 31% from over 45%. Its gearing was raised by its recent acquisition of an office property in New South Wales, Australia for A$56.7 million (R650 million) at a net yield of 8.3%.

Investec Australia has been agile in its growth through acquisitions. When Investec Australia listed in 2013, it only had eight office and industrial properties worth A$129.9 million (R1.5 billion). It now manages 19 properties valued at A$461 million (R5.3 billion). The fund is inching closer to its goal of managing a property portfolio worth A$1 billion (R11.5 billion) within the next three years.

Investec Australia CEO Graeme Katz, who was in SA speaking to fund managers this week, says the fund is looking to make its foray into the retail sector but has struggled to find suitable assets. “The pricing of retail assets in our view is tight and there is limited growth in some of the leases and we won’t acquire retail assets for the sake of acquiring assets,” he says.

Keillen Ndlovu, head of listed property funds at Stanlib, says the property fundamentals of Investec Australia ticks all the boxes; long leases, quality tenants, and overall good management.

“Investec Australia’s management have guided good growth numbers for 2016 and therefore, the counter seems to offer good value not only as a rand hedge but considering the reasonable yield that it is trading at,” Ndlovu explains.

Another offshore property company following suit is UK and Western Europe play Atlantic Leaf Properties, whose management are on a road show to raise £90 million (R2 billion) to fund an acquisition of a portfolio of properties in the UK.

Rand weakness, a boon

The weakness of the rand against major currencies, coupled with the volatility of bond yields, has made investors wary of not holding enough rand hedge stocks in their portfolios, says Meago Asset Managers director Jay Padayachi.

“However, again it becomes a question of the underlying fundamentals being the basis of your investment as opposed to merely being attracted to hard currency exposure,” says Padayachi.

Latest figures show that approximately 35% of the FTSE/JSE South African property index is exposed to foreign currency earnings. Unlike most SA-focused counters, offshore companies continue to typically trade above net asset value, Grindrod Asset Management chief investment officer Ian Anderson explains. “This allows them to continue issuing new equity to fund transactions and or pay down debt without diluting existing shareholders,” says Anderson.

The run of individual offshore stocks of Romania-focused New Europe Property Investments, UK play Capital & Counties and Intu Properties have rerated, suggesting that the love affair with rand hedge stocks might be slowly cooling down.