Listed property is entering a period of consolidation. As we know, interest rates are rising, which drives up the cost of financing. This typically has a subduing effect on property prices, because people have a reduced appetite for taking on high-interest-rate debt. At the same time, companies’ monthly interest payment expenses increase, so they are less eager to spend money on fancy office space. The net effect of all of this is that the property market typically underperforms other asset classes when rates rise.
Thus, for commercial property companies, the focus during such periods must be on securing funding at favorable rates. In order to secure such funding, companies need robust balance sheets, which is where the pressure to consolidate arises – consolidation means a bigger portfolio of properties means a stronger balance sheet. We’re just at the beginning of the rising interest rate cycle, which means that we can probably expect to see more activity in the sector over the next eighteen months. – FD
ALEC HOGG: Growthpoint plans to acquire Acucap Properties and Sycom Property Fund in a deal valued at R4.6bn, while Resilient wants to raise R1bn through a rights offer – lots happening in the property sector. Craig Smith, who is the Portfolio Manager at Stanlib, is with us. I’m just having a look here at Growthpoint. It’s incredible. It’s a R50bn company now, which is great size-wise, but the share price has been under pressure – down ten percent in the past year. Now, it’s doing more acquisitions. It presumably thinks if it’s using paper (and you can enlighten us on this) that the share price is still at a level where it’s good value to the company – maybe, not that good value to the investors.
CRAIG SMITH:  Yes, that’s quite correct. What happened was that from about last year in May, you obviously had the Fed tapering concerns and that had a significant effect on listed property in South Africa. Growthpoint, being one of the more liquid counters, was really one of the first ports of call to feel the brunt of that pull back. The share price has come back in the short term, but around May/June/July, the share price was significantly impacted through those concerns. Growthpoint has been quite active. I’m sure you are doubtless aware of the previous battle for the Fountainhead assets, which Redefine is currently in talks with Fountainhead’s board of directors about, to try to reach some type of agreement there to effectively take out Fountainhead. Growthpoint’s been on the lookout for quality retail assets for quite some time, and Acucap and Sycom certainly fit that profile.
GUGULETHU MFUPHI:  The ongoing consolidation…you mentioned Growthpoint. They are our landlords as well. I don’t know if you saw the board outside. What’s driving the increased rate of consolidation in the property sphere?
CRAIG SMITH:  The big driver has been the cost of funding, so certainly, debt funding has moved up. Equity funding has moved up as well. Especially in the smaller to mid-caps, you’re finding that those counters are becoming increasingly difficult for them to find opportunities at yield-enhancing levels.
GUGULETHU MFUPHI:  Let me just interject there. Would those be the likes of Ascension, Delta, and Rebosis?
CRAIG SMITH:  Correct, the type amongst those counters is what they’d effectively be looking to achieve as a bigger merged entity that’s more liquid, and certainly, would have a stronger balance sheet. That allows them to potentially secure preferential funding from the banks.
ALEC HOGG:Â Could you see the consolidation continuing?
CRAIG SMITH:  I think we could. It’s been quite active, so you obviously have the likes of Ascension, Rebosis, and Delta (in talks). You have Sycom, Acucap and Growthpoint now. Redefine has been quite active as well with annuity property fund and certainly, looking to ramp up the Fountainhead leg. I think you could see some more consolidation, but it certainly has been quite an active last couple of months.
GUGULETHU MFUPHI:  There’s recently been a new listing, Safari, which focuses on retailers in the townships. Are they a potential target for the consolidation?
CRAIG SMITH:  The difficulty in being that size is that it’s obviously very challenging to grow. Again, to my point with…even though they’re lowly geared, because they’re small it makes it difficult to buy properties at yield-enhancing levels. They do have a development pipeline, which should give them some scope to grow over the next couple of months but I would certainly think that with a quality portfolio of retail assets, they would more than likely end up on the likes of a bigger counter’s radar.
ALEC HOGG: So it’s not surprising to you. When we had him in the studio, he told us he’d had two offers already before they’d even listed. Are there any property stocks that stand out as potential takeover prospects for private investors to go and buy some of those shares?
CRAIG SMITH:  I think a lot of activity has taken place. You’ve obviously seen Vukile as well, being quite active – getting stakes in Synergy and Fairvest. I think the obvious one would be a counter like Safari (newly listed) even though they have a very good track record in unlisted space/listed space – a bit of an unknown entity with very good quality assets, so certainly, I’m sure there would still be a number of listed counters that would be very interested in acquiring their portfolio.
