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Three reasons why property are more lucrative

Posted On Monday, 20 May 2002 10:01 Published by
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Investors could get capital gain, a sector rerating, and income

Investors could get capital gain, a sector rerating, and income

Primegro, one of the 20 companies listed in the JSEs property loan stock (PLS) sector, has staved off a takeover by the big three property unit trusts (PUTs), Grayprop, Sycom and Martprop. But more takeovers are likely in a sector bubbling with activity and opportunities for private investors.

With only Grayprop worth R2bn and three others more than R1bn, the property sector is too small to get the close and undivided attention of institutions. Also, its mainly small-cap counters are trading below the net value of their properties and only one analyst covers the sector: James Templeton of Barnard Jacobs Mellet.

But the industry plan is to correct this by increasing the market cap of the PLS and PUT sectors from R14bn to more than R30bn within two years.

Primegro joint MD Martin Ettin says only R5bn property funds will start attracting big-hitting overseas investors and trigger a rerating of the sector something that could take up to five years.

For private investors, though, the sector is liquid enough and there are opportunities to gain if they buy now, adds Ettins co-MD Derek Greenberg. Investors could get short-term capital gains as interest rates drop again, bringing PUT and PLS yields with them (see article page 87). The value of the investment rises when yields drop. They could buy into a sector that will gain relative value as funds consolidate, grow and lose their current discount to net property value and perhaps to long bond yields. And theres also the prospect of better asset management and improving property fundamentals, which could translate into exceptional income growth.

The existing property funds can either swallow other funds to grow quickly or buy more properties and build up bulk slowly.

There has already been a lot of consolidation in the PUT industry. Grayprops acquisition of sister fund Grayvest took the fund past the R2bn market cap mark the first fund to get there. Primegro swallowed Richway late last year and doubled its primarily retail portfolio to R2,4bn and its market cap to R800m. Pangbourne gobbled up CBD and Pioneer. Growthpoint merged with the Mines Pension Fund. Hyprop and Cenprop are trading under cautionaries. Spearhead, Paraprop and other teeny-cap funds are ripe for the picking.

At present, it is more difficult for funds to grow organically by directly buying properties. There was a short period when fund cap rates were at a premium to property cap rates (see table). But this gap disappeared when interest rates and fund yields rose this year.

Swapping shares for physical properties is not really an option at the moment because it would mean a dilution in yields. Paying cash for properties would mean incurring additional debt. ApexHi, the high-risk, highyield PLS, is one exception because it is prepared to buy properties that other funds are selling at high yields.

Another problem confronting the sector is that institutions have overvalued many of their R70bn property portfolios, making it difficult to swap properties for listed paper.

Ettin expects private developers such as Industrial Property Developers, Barrow Construction, Tiber, RPP Developments and Bridgeport to become the main suppliers of stock in the future.

Growth is also expected to come from new listings, but rising interest rates have stopped these for the moment. Acuprop, a listing by NIB and Sanlam, recently listed and Iprop and JHI have a fund ready to list as soon as rates come down again. Standard Bank, Catalyst and RMB are also said to be waiting in the wings.

Another investment opportunity will emerge when property incomes improve, as the commercial property market slowly recovers from its present doldrums or when smart management finds ways to improve income streams.

The property entrepreneurs coming into the sector, such as Ettin and Corpcapitals Marc Wainer, are more likely to achieve these income improvements. Where an institutional manager would only buy an established centre on a 10,5% or 11% yield, Corpcapitals Hyprop bought and turned around The Glen, a struggling south Johannesburg centre, which now yields 13%.

Once the sector reaches a market cap of R30bn, funds will become more specialised and investors will be able to choose from a wider spread of risk and yields. This diversification has already begun.

But the sector must tidy up a few other issues before it gets the full confidence of the market, says Cape investor Alan Groll: Some funds still do not own their management companies and these managers do not always work in the interests of investors. But Templeton says giving managers incentives has helped.

Financial Mail

Publisher: Financial Mail
Source: Financial Mail
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