Property Flash


SA’s R236bn rand listed property sector is ripe for consolidation. It’s been nearly a decade since property companies adopted the real estate investment trust (Reit) dispensation as they sought easy to access capital. Fund managers threw money at these Reits which by definition were required to pay them at least 75% of their distributable income as dividends. They were regular income payers focused on growing their dividends. Companies liked being Reits as the dividends were taxed in the hands of the shareholders and not at a bottom line level.

Many landlords listed just to become Reits and to ride the listed property boom. But the glory period of 2014 to 2017 is now over and property companies are languishing. Each month the South African listed property index (Sapy) seems to suffer a double-digit negative return.

Reits are struggling to finance developments given that hey have to borrow funds at high interest rates while their cash flows are under pressure. Their tenants may be locked into rental agreements but trying to sign new agreements with escalations is a battle while businesses struggle to get by in a weak, uninspired economy. The government is yet to present a plan to solve South Africa’s electricity crisis. Investor confidence is at decade lows and obvious silver linings just aren’t appearing.

But a less obvious silver lining for real estate investors is that a wave of consolidation may be on its way. Numerous property funds which listed with market capitalisations of between R1bn and R4bn are now looking like sitting ducks for larger funds who want to expand their asset bases. These funds can also bring greater liquidity to the smaller funds. This will benefit investors who want exposure to relatively large companies. Some fund managers are even mandated to invest in companies with market capitalisations which start at a certain size.

Diversified property owner Heriot Reit has made a cash offer for the shares it doesn’t already own in semi urban area and lower LSM mall owner, Safari Investments. The offer is R5.60 per share for Safari, a company which battled for a number of years, with its share price struggling to gain momentum and with recently departed directors stifling attempts to reward shareholders with good dividends. These directors had been focused on related party deals and often lacked property management qualifications, skills and experience. A combined Heriot and Safari would have an asset base worth R8.5bn and a market capitalisation of R5bn. Heriot’s founder, Steven Herring has already improved Safari’s board on which he sits as chairman. Assumedly if the takeover goes ahead, we can expect to see more mergers and takeovers. With each deal, fund managers will become more confident about the next one.

Property will always be driven by the overall performance of the economy, its growth and confidence within it. When South Africa climbs out of its perpetual hell and the private sector pumps money and activity into the economy, listed property may boom again.

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