Private Placement partly blamed for drop in SA’s property stocks

The listed-property index (FTSE-JSE Sapy) dropped by 16% since May 20, and private placement “fatigue” has been partly blamed for the sharp sell-off in property stocks over the past two weeks.

Though it’s only five months into 2013, the listed property sector has already raised a total of R10,2bn in fresh capital for the year to date. That’s nearly on a par with the R11bn raised by the sector in the whole of 2012, according to Stanlib’s figures.

Most of the capital raised will fund new acquisitions, as property stocks continue to chase growth.

Grindrod Asset Management chief investment officer Ian Anderson says listed property companies have been raising new equity capital at an unprecedented rate and it was only a matter of time before these issuances would have a negative impact on prices.

He says though the market has in recent weeks also been digesting a substantially weaker rand and higher bond yields, Growthpoint Properties’ hefty R2,5bn rights issue, which closed two weeks ago, was the tipping point for the sector. The counter’s price has dropped by around 16% since May 20.

Growthpoint’s book build was one of the largest ever undertaken by a listed property company. According to management, the money will be used to fund potential acquisitions in SA and Australia, as well as redevelopments within Growthpoint’s existing portfolio.

Vukile Property Fund, one of the sector’s most aggressive growth counters, has raised an equally hefty R1,4bn in new equity. Vukile’s key acquisitions include a R1,5bn portfolio of properties from Sanlam and, more recently, 50% of the East Rand Mall, for R1,115bn.

Last month Vukile announced the acquisition of four government-tenanted buildings from unlisted black economic empowerment entity Encha Properties for R1,4bn and recently entered talks to buy five shopping centres from developer Atterbury.

Vukile CE Laurence Rapp says in the year to March the fund’s portfolio value increased 44% to R8,7bn. When the Encha deal is concluded, the portfolio will breach R10bn. Rapp is looking to grow Vukile’s portfolio to R15bn within the next three years.

In another recent big-ticket deal, Hyprop Investments bought the Somerset Mall from Sycom Property Fund for R2,3bn. Redefine Properties, the sector’s second-biggest fund with a market cap of R30bn, raised R800m earlier this year after a series of strategic acquisitions (including a 50% stake in the East Rand Mall, for R1,115bn, with Vukile).

Redefine earlier this year also acquired a 45,6% stake in Fountainhead Property Trust, an investment worth nearly R5bn.

However, it is the newer, smaller players with market caps below R5bn that have been most active in growing portfolios in a bid to increase size and improve liquidity.

For the year to March, Investec Property Fund concluded R2,1bn in acquisitions, and raised R1,5bn of new equity. Empowerment player Delta Property Fund, a prominent landlord in the government-tenanted space, successfully raised R1bn earlier this year through a rights offer to help fund the acquisition of 24 properties for around R2,3bn. The conclusion of the transaction will more than double Delta’s portfolio value to R4,3bn.

Rebosis Property Fund and Vividend Income Fund raised R650m and R539m respectively to fund various acquisitions, while office-focused Vunani Property Investment Fund said last week that it planned to raise up to R760m by way of a rights offer to grow its portfolio.

Synergy Income Fund, whose portfolio comprises mostly Spar-anchored shopping centres in rural areas and townships, bought Atlantis City Shopping Centre in the Western Cape last month for around R334m.

Dipula Income Fund, which also owns a number of rural and township malls, acquired assets worth R737m in the six months to February, with properties worth another R945m awaiting transfer.

Keillen Ndlovu, head of listed property funds at Stanlib, says fund managers have seen a positive inflow of money into listed property as investors search for yield. Most capital raisings have been heavily oversubscribed.

Ndlovu says the surge in equity raising efforts has been driven by listed property companies taking advantage of the strong run in property share prices — the property index was up nearly 40% in the 12 months to May 17.

Higher prices, and therefore lower yields, make it more attractive for companies to raise capital from shareholders than from banks.

Ndlovu notes that equity raising is good for the listed property sector as it means increased size, liquidity and choice for investors. However, there are also risks involved, such as share price weakness.

Apart from the negative impact on share prices, there is also concern that increased competition for assets is prompting listed property funds to overpay for properties.

Recent transactions such as the sale of Somerset Mall and East Rand Mall were concluded at record low yields of around 6,7%, setting a new benchmark for retail property prices. Yield is an indicator of value in property deals — the lower the yield, the higher the price and vice versa.

When Growthpoint and the Public Investment Corp bought the V&A Waterfront, arguably the jewel in SA’s real estate crown, two years ago at a yield of 7,25%, many analysts believed they had paid too much.

Sesfikile Capital director Mo Kalla says the aggressive growth strategies of many listed players are encouraging some to overpay for assets, which could come back to bite them through lower distribution growth.

Kalla says from now on listed funds that want to come to the market will have to offer more attractive pricing, as investors will become more selective in which capital raisings they support.

While most funds could until recently get away with issuing new shares at a discount of no more than 3%-4% to ruling market prices, Kalla says that gap may well have to increase to at least 7%10%.