May 22 2023
Equites Property Fund, the JSE-listed landlord which owns top-end logistics assets surprised some of its investors two weeks ago when it announced that certain economic conditions including high interest rates meant the group could no longer continue its UK development joint venture (JV) with Newlands Developments.
South African investors were initially attracted to Equites when it listed in 2014 because it was a landlord with a healthy SA development pipeline which attracted blue chip tenants. Then later on when the group expanded into the UK, it built a new, attractive development pipeline which is suddenly set to disappear.
Equites said in a statement that during the second half of the financial year there was a sharp increase in interest rates which caused substantial cap rate expansion in the UK logistics property market with prime logistics yields shifting outward by 175 basis points to 5%. Market rental growth cushioned a portion of the negative effect of rising property yields, but the value of Equites’ UK portfolio declined 21% on a like-for-like basis, in sterling. Its SA portfolio’s value performed in line with expectations, increasing 4.3% on a like-for-like basis, which pleased investors.
“Following several expressions of interest in the UK platform, Equites has decided to explore strategies to unlock value from its shareholding in ENGL (the partnership with Newlands). The partnership with Newlands Developments has successfully completed several developments and retains an expected development pipeline of c.£2bn (R44bn), over the next seven years. Its board believes that it is in the group’s best interest to explore the sale of its stake in the development platform and has appointed Rothschild & Co as its corporate advisor to facilitate a transaction. The stake in ENGL will only be sold if the board believes the offer will maximize value for shareholders,” it said.
Jay Padayatchi, the owner of Meago Asset Managers, a boutique investor in property funds said Equites’ share price had run hard but the shift away from the UK meant the fund would have to do different things to impress investors once again.
“This is why Equites historically traded at a premium to its peer group. That entire development pipeline is now being disposed of. A change in the economic environment forced their hand I suppose but is a blow for the fund. The SA environment is not going to be a big earnings driver compared to what the UK did for Equites previously. So how do you justify a premium rating now? The question is a lot more difficult than it used to be,” he said.
The company is beginning to look a little more ordinary after hitting so many highs. It’s not that it had stopped investing in SA but now its focus is heavily back on its homeland. Let’s see if it can get back to consistent profit and maybe even double digit dividend growth again over the next three to five years.
Equites’ share price has fallen 13.16% on a 30-day basis, closing at R13.20 on Monday, 1.93% lower on the day. Its market capitalisation sat at R10.6bn. Equites’ SA portfolio is worth R17.6bn and its UK portfolio is worth R9.3bn.