The listed property sector is in acquisitive mode as companies aim to enhance distributions, bulk up the size of their property portfolios and attract more local and foreign investment. With quality property stock in short supply in the open market, it has been argued that one option would be for the listed property sector to start courting corporations with large property holdings. In the past it has been argued that the yields were not then attractive enough to encourage non-property companies to consider taking their property holdings off their balance sheets.

But with forward yields on listed property at historic lows of 6%-7%, now more than ever there could be benefits to selling property into listed property counters. Yields drop as prices rise.

Explaining this, De Klerk says an investor may have a listed property share which is worth R1 and is receiving a distribution of 10c. This gives the investor a 10% return. But if interest rates drop and suddenly investors require an 8% return, then an investor would be prepared to pay, for example, R1,25 for the stock.

The scenario where yields drop means there is a lot of investor demand for yield instruments. Investors are prepared to take a lesser return to get hold of the investment.

“There is demand for listed property income. Investors that have recognised that the underlying property fundamentals are strong are prepared to pay up for listed property counters and accept a lower initial (year one) yield as they believe the solid growth in distribution will provide them with an attractive return in the future years two, three and four.”

De Klerk says that as the forward yields of listed property counters come down, it puts the listed property sector in a position where it can pay more for fixed property. “This is because the yields at which they are trading are lower than what they would be acquiring the fixed property assets at. The implications for the vendor (seller of property) is that the capital which is released out of the disposal of a building will have an enhancing effect on their earnings.”

He says the global trend of private equity deals could also assist listed property companies seeking property assets.

De Klerk says a private equity player may take over a non-property company with large property holdings and then dispose of the properties on a sale and lease-back basis to generate cash to lower borrowings.

But Marc Wainer, executive director of listed property asset manager Madison, which manages listed property companies ApexHi Properties, Hyprop Investments and Redefine Income Fund, says often the large, non-property companies with large property holdings on their balance sheets either do not have the need for cash — because they are already sitting on a large cash pile — or they have no reason to sell.

Wainer says Imperial Holdings, for example, which has a large property portfolio, is already sitting on a large cash pile. If Imperial decided to sell its property in a lease-back agreement, what would it do with the money?

On the other hand, non-property companies with large property holdings could become attractive targets for large private equity players. Wainer says the private equity player could sell the properties to lower its debt incurred in the takeover.

He says it would make sense for non-property companies that have a need for cash to sell their properties in sale and lease-back agreements.

“If they have a need for cash then this is an excellent time for them to sell their property because the yields are at all time low,” he says.

Wainer expects some non-property companies with large property holdings to start selling their property. He says some private property funds might also look at listing their portfolios.

“If I was involved in a private property fund I would cash in right now at yields of 6%-6,5%,” Warner says.