By Ian Fife  

Attfund, Corovest and Madison are first out of the starting gates in race for international stakes   
 
The shortage of property investment opportunities, and falling investment yields, are about to push SA property funds into the global property market.  The first listed fund to go global will probably be Redefine, a R2bn market cap hybrid with a R3,5bn portfolio of both property and other listed property funds. 

Redefine's promoter and manager, Madison, is in "final negotiations" with a Coronation subsidiary, UK-based Corovest International, to take a large stake in the listing of a £200m (R2,4bn) UK retail fund, says Madison deal maker Marc Wainer. It will become a co-manager of the fund with Corovest.

Unlisted R2bn property fund Attfund is also about to invest up to R200m in US and European listed funds.  Initial yields on most prime funds listed on the JSE are about to drop below the 6,9% mark reached briefly by one fund, Sycom, in 1987, while international rates are around 5% to 6%.

This is part of the global phenomenon of yield compression, in which the yield gap between the most and least desirable properties narrows.  Property has become the world's favourite investment medium because of its high, steady yields, compared with volatile stock exchanges and money markets in the current environment of economic and political uncertainty.  Property prices are usually unaffected by terrorist incidents.

For instance, the London bombings last week rocked international stock exchanges, if only briefly, while property demand, even in London, was unaffected.  The market is also being driven by record low interest rates and a big appetite for debt by property funds and banks that allow investors to fix their borrowings over 10 years at 5%/year or less.

As a result, property yields have fallen even as interest rates have risen, against the historic trend.  This has given SA investors in the portfolios of UK property promoters such as Corovest, Credo and Athanor unexpected opportunities to cash in their investments at huge profits. It has also increased SA interest in offshore commercial property investments.  But the yield gap has limited demand. 

SA property capitalisation rates are now declining faster than global property as this country returns to normality after 30 years of political and economic instability. The international property frenzy is slowing down, according to UK property economists Capital Economics.

Yields in Britain continue to fall, but foreigners remain net buyers.  Corovest has been preparing to convert its Corovest International Real Estate Fund into a listed fund to take advantage of new UK legislation allowing real estate investment trust (Reit) listings on the London Stock Exchange. Corovest CEO Mike Watters expects to list the fund late this year or early next year with a market cap of about £200m (R2,4bn). 

"The core of the funds will be holdings in two major UK retail centres we are developing in Newport and Crewe, at £200m each," says Watters. "The SA investor interest has been amazing. We are working closely with Marc Wainer on the project but nothing has been signed yet." 

He says legislation for the LSE to have Reits is being held up because of concerns about withholding tax for foreigners. "If the delay is too long, we'll do an interim listing on the alternative investment market, in the investment trust sector of the London stock exchange or on the Jersey stock exchange." 

This will be followed six months later with a dual listing on the JSE, eliminating any exchange control problems for SA investors. They will have a choice of Liberty International, currently at a yield of 2,6%, and the Corovest fund, at between 4% and 5%.

But there is a good chance that Liberty will convert to a Reit, increasing its payouts to about 4%.  Madison and Attfund will get around exchange controls through asset swaps with large institutions, which have permission to invest abroad but don't have the appetite to use their full allowances.