By Ian Fife

The world is awash with money chasing cross-border property deals. Yields are falling and prices are rising to record levels as private and institutional investors pour billions of dollars into exotic destinations such as India and Croatia in search of reasonable returns.

Low interest rates and low returns in other asset classes have pushed retail property investment yields in London's West End to as low as 3,5%/year and prime European offices to below 5%.

This is frustrating for SA investors whose own properties' falling yields are bringing them close to European rates. For instance, blue-chip listed property funds have yields close to 6%.

But Credo, an SA-owned, London-based private equity company, has built a R5bn portfolio in three years. And it expects this sum to rise to R10bn in another five years by sticking to investing in the traditional UK and European property markets.

Credo is finding yields that are becoming inviting to SA funds.

Gavin Rabinowitz was a senior lawyer at Nabarro Nathanson, a large British law firm , when he joined another South African chartered accountant, Roy Ettinger, to launch Credo. Ettinger is CEO, Rabinowitz Credo's property director.

It's partly luck that their first British property fund performed brilliantly. They launched it in 2003, when interest rates were expected to rise and property prices to fall.

But the global economic imbalances that have kept the dollar's value high and interest rates low triggered an unexpected rush into property. This has given their investors a windfall return of 78% on their investment in less than two years - 21% of it in payout of their equity. Their ?17,23m (R200m) cash investment has turned into ?30,66 (R352m).

But Rabinowitz points out that the 78% return was well above the Investment Property Databank's 42% return for British institutional property over the same time. The London FTSE's return was 31%. Now Credo has launched its first European property fund, bringing its total portfolio to more than ?420m (R5bn).

The fund has already bought 15 Netto supermarkets, six GWB shopping centres and a portfolio of ATU auto parts and service centres, all in Germany.

"The yields on these properties are up to 8% and we have fixed long-term borrowings at less than 5%," says Rabinowitz. "The tenants are major retailers who have signed long leases."

The structure, typical of Credo, turns it more into a financial than a property investment, with most risk eliminated and predictable long-term positive cash flow. Credo is also developing and refurbishing neighbourhood shopping centres with a British public company.

"The key to finding good yields in traditional markets is to understand the difference between European and SA property law and traditions," says Rabinowitz. "All the money in the world will not necessarily bring you the best opportunities.

"Parties can withdraw from deals at the last moment after lengthy negotiations and due diligence. So sellers are deeply concerned about whether they can trust the buyer to follow through to the end. We learnt this at Nabarro Nathanson and had the chance to develop excellent relationships with major property owners. Our opportunities have come from them."

The European fund will be a minimum ?50m (R575m) portfolio with equity of at least ?15m (R172m). But the gap between income and interest rates and certainty of income means that the fund can borrow up to 85% of the property value and grow to ?100m.

Financial Mail
Publisher: I-Net Bridge
Source: I-Net Bridge