Still worth a punt

Posted On Wednesday, 23 May 2007 02:00 Published by eProp Commercial Property News
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Ask any analysts or fund manager if there are any cheap steals left in the listed property sector and the unanimous answer is "no". After all, the sector is trading at an average 56% premium to net asset value.

Evan JankelowitzAs Stanlib property analyst Evan Jankelowitz says: "Investors should no longer be looking for bargain entry points into the sector as they won't find any. However, if you're after long-term value, there are still buying opportunities."

Jankelowitz says the listed property investment regime has changed quite dramatically over the past four years, forcing investors to do exactly that - invest - and take a longer-term view. "In 2002 you bought listed property because it was an untapped resource that offered significant upside. Therefore, it was a yield compression:price appreciation play. That's no longer the case. Four years on it's become an earnings growth game."

Catalyst Fund Managers MD André Stad-ler holds a similar view. He says the sector's ongoing consolidation drive has already unlocked value in most of the smaller counters, placing the yields of even second and third line property funds roughly on a par with those of top-rated funds.

There's no doubt that it's becoming increasingly difficult to find short-term value, says Macquarie First South Securities property analyst Leon Allison. "The strong up-tick in demand for property scrip has seen share prices surge across the board. So there are very few - if any - property stocks that have been overlooked by investors."

However, Allison says that over the longer-term the sector will continue to provide solid returns as healthy property fundamentals improve further. He forecasts total returns of 14% for the sector over the next 12 months and 32% (cumulatively) over the next two years.

Says Allison: "Rising building costs, lack of infrastructure, delays in rezoning and contractors with full order books will combine to limit new supply, boosting market rentals and valuations."

International investors will provide a further underpin over the next 12 to 18 months. Allison says SA could possibly be included in global real estate indices - such as the FTSE EPRA/NAREIT in the future - that should place SA's listed property sector on the radar screens of international fund managers.

But where to for punters with a shorter-term view? Investec Listed Property Investments CEO Angelique de Rauville says the best bet for short-term gains is stock that may be subject to corporate activity. Recent buyout offers, such as the PIC/CBS and Acucap/Atlas deals, have generally been pitched at sizeable premiums, creating nice upside. But share prices react quickly to corporate action, so the trick is to buy into such funds before merger and acquisition bids are announced.

De Rauville says investors have already missed the boat with both CBS and Atlas. However, she believes there could still be merger activity on the cards between the Pretoria-based Wapnick family's two funds, Octodec and Premium.

Stadler agrees that short-term opportunities will be created predominantly by M&A activity. He says Ambit is one of only a few smaller takeover targets left in the sector. The fund issued a cautionary last week, saying it's involved in negotiations that could affect its share price.

Stadler says it's not impossible that Madison-managed Redefine, which already has a stake in Ambit and is one of the sector's most aggressive acquisition players, may be staging a takeover bid for the fund. Absa holds a strategic stake in Ambit and may be a willing seller at the right price.

Allison's top pick on both short- and long-term valuations remains sector heavyweight Growthpoint. He expects the Investec-managed fund to deliver total returns of 25% over the next 12 months.

There are a few funds that have underperformed the market in recent years and which offer catch-up potential. Allison places RMB-managed Emira at the top of that list. Emira's proposed buyout of sister fund Freestone is positive, as the deal will create a much bigger and better diversified portfolio.

Allison also rates niche hotel fund Hospitality B as a buy at current levels. The fund should continue to deliver above average income growth on the back of rising hotel occupancies in the run-up to the 2010 Soccer World Cup.

Jankelowitz says that even Hospitality A - the lower risk alternative to the B units - is a great proposition, particularly as an alternative to bonds. "It's a no-brainer. On current prices you're buying a forward yield of 7,7% and getting an almost guaranteed growth of 5%/year for the next five years. Where else are you going to get that sort of income growth in such a limited risk structure?"

Jankelowitz says Pangbourne and its stable of niche funds - including Calulo, Siyathenga and iFour - deserve a closer look. It seems that the market has generally not yet taken to Pangbourne's multi-fund strategy, with the funds recording rather muted share price growth over the past 12 months.

But Jankelowitz says they like the improved quality of Pangbourne's property assets and aren't put off by the various sources of revenue. The new management team is also highly impressive, finding innovative ways to generate value.

He also rates Des de Beer's Resilient and associated fund Capital. "Resilient's regional dominance in the nodes in which it operates and Capital's quality enhancement, especially on the industrial front, have impressed."

Analysts concede that there may be opportunity for investors to take short-term stags at riskier, small cap stocks including Orion, Fairvest and Bonatla.

But De Rauville says those funds aren't nearly as attractive as their more established peers, where management has built up solid track records.

De Rauville agrees with Jankelowitz that it's ultimately all about earnings growth, as that will drive share price growth. As such, she favours Growthpoint, Redefine, Resilient, Diversified, Octodec, Premium and Hyprop.

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