Ian Fife

Redefine is in the UK, Nepi is in Romania

They’re divided by size as much as geography

“Political problems in Romania are minimised because [Romania] is bound by European law. They won’t affect our returns”

— MARTIN SLABBERT

New Europe Property Investments’ (Nepi)buying spree on retail centres in Romania, one of the poorest Eastern European countries, is not without risk (Money December 18).

As a fund manager and an offshore consultant point out, the president won the recent election under a cloud and the ruling government coalition has collapsed. The country is waiting for a US20bn IMF structure plan and though it is an EU member it is not yet part of the Eurozone.

But these facts don’t change the FM’s view of Nepi’s attraction — or our choice of it as our property hot stock for 2010 (see page 34).

This case highlights the role of small funds like Nepi in SA’s property investment market, and how they change as they grow. This becomes more important to investors as SA funds move rapidly to invest offshore.

It is ironic that the fund manager who questioned the Nepi investment logic is Redefine executive director Brian Azizollahoff, who was ApexHi MD before Redefine swallowed ApexHi last year. The fund was launched eight years ago to specialise in properties in secondary rental markets such as the Johannesburg CBD. It was a B-class share that was paid out only after the A shareholders had been paid their share.

Professional property investors piled into the high-yielding B shares despite warnings from analysts that the risks were high. This was the first time that a well-managed fund had offered higher risk and a textbook example of smart entrepreneurial property asset management. Soon institutions were investing in ApexHi and it was one of the JSE property sector’s blue chips when it merged into Redefine.

Azizollahoff applied the same basic rule of success in the Johannesburg CBD as Nepi is doing in Romania: find a niche and manage the risks to maximise yield. But then ApexHi became Redefine and grew into one of the two giants of the JSE property sector. When Capital and Pangbourne merge this year or next, they will join Growthpoint and Redefine in dominating the sector with the funds likely to hold close to 60% of the property sector’s market capitalisation.

The advantage of big funds is the initial rise in yields that come from spreading the fixed costs among multiple properties. And in being rerated, as institutional funds are attracted to the liquidity of their enormous number of shares.

However, they then concentrate on diversifying their risks among hundreds of properties and avoiding properties that are too small. In the case of Redefine and Growthpoint, this is about the R50m level. This creates opportunities for small funds to move in.

Nepi MD Martin Slabbert has no choice but to manage the Romanian risks. But as Azizollahoff learnt through his Johannesburg CBD properties, intimate knowledge of your turf and close management create the skills that substantially reduce that risk.

“The political problems in Romania are minimised because [Romania] is bound by European Union law,” says Slabbert. “I’m quite comfortable that [these problems] won’t affect our returns.”

What is more important to long-term payouts to investors is that Romania’s retail malls are about as undeveloped as SA’s were in the early 1970s and its household incomes are among the lowest in Europe. This means a long-term rise in demand for shopping centres that is almost certain to outperform the rest of Europe.

There is little sign that Romania’s currency, the leu, is likely to collapse against the euro, in which Nepi’s payouts are denominated. In fact, UK consultancy Capital Economics’ forecasts for Romania’s retail property investment market indicate it will rise against the euro (see graph page 56 top). It expects Romania’s retail properties to give an average annual total return to investors of 16,2% by 2014, most of it income rather than capital growth. This cash flow is the attraction to investors.

Capital Economics expects the high yields partly because of the appalling performance of retail in 2009, when rental values fell 46% (see graph page 56 bottom). At the end of that period Nepi began snapping up retail bargains. And Nepi’s experience in SA’s relatively undeveloped market should ensure it outperforms Capital Economics’ forecast for the sector. Once Nepi takes transfer of the properties, shareholders can expect payouts to rise to 9% after tax, the equivalent of 12%-15% pretax payouts by the other funds.

Norbert Sasse, CEO of sector giant Growthpoint (market cap: R20bn), says he acquired control of Australia’s Orchard Industrial Property Fund, since renamed Growthpoint, on a 9,4% yield. The difference is that this yield will be diluted among the fund’s 440 properties, while Nepi’s returns go straight to its shareholders.

But Nepi’s returns in Romania shouldn’t detract from Growthpoint’s venture in Australia or Redefine’s in the UK, Germany and Australia through London listed Redefine International. This despite Capital Economics’ forecast of UK retail average annual total returns of only 8,9% to 2014. Redefine and Growthpoint will outperform these forecasts.

Redefine CEO Marc Wainer says even if he were 38, like Slabbert, who now lives in Romania, he would still invest in the UK market. “I believe it offers a better reward for risk return,” he says. He also believes Redefine is managing to retain the entrepreneurial flair that brought it to its current size.

“In fact, size allows us to take bigger risks,” he adds. “For instance, we can buy a premium-grade property in Sandton at a good price knowing that it will be empty in October. We expect to rent it at a yield enhancing rental, but if we don’t, it will not affect our payout this year.”

Still, it will mainly be large institutional investors he’ll be making happy. Some of their 18000 shareholders will be buying into Nepi for its almost certainly higher payouts. In time, though, it may — if Slabbert is lucky — become a big giant in its own right, offering a sound investment but losing some of its nimbleness of foot. What the JSE needs is more Nepi-type funds.

The writer and his family have shares in Capital, Growthpoint and Redefine

Source: Financial Mail