May 30, 2013:
A number of listed property companies are disposing of non-core assets while targeting larger properties with a higher value in search of efficiencies.
Market commentators warn however that there is a very real risk of overpaying and investors could also have difficulty in obtaining good quality assets.
Izak Petersen, chief executive officer of Dipula Income Fund, says the group is forging ahead with its strategy of portfolio growth and aims to increase the quality, size and value of the its assets.
When the integration of its current acquisitions are finalised, the fund will have increased the average value of the properties in its portfolio per square metre from R4 830 to R6 774, while almost doubling the average property value to R23.8m since its listing in August 2011.
Speaking at the fund’s interim results presentation, Petersen said when the fund was established it bought a large number of small single-tenanted properties, as a means to diversify.
“As you grow bigger, definitely from an efficiency of management point of view, you have to reassess that position,” he says.
Emira Property Fund is also disposing of non-core assets. These include the Montana Value Centre, Worldwear Fashion Mall and Fleetway House.
James Templeton, chief executive officer of Emira, says most of the property unit trusts and property loan stocks are trying to grow their funds with bigger, but fewer properties.
He says by selling non-core properties which are generally smaller, more time-consuming properties, companies can reinvest the proceeds in a bigger, easier to manage, modern property that is going to perform better in the long term.
At the end of December Emira had 146 buildings with a value of almost R10bn. It aims to grow the size of its fund to around 150 properties with a total value of R15bn.
At its recent results presentation, Sandile Nomvete, chief executive officer of Delta Property Fund, also highlighted that it is easier to get synergies and efficiencies out of larger properties.
Anton de Goede, property analyst at Coronation Fund Managers, says other companies that have highlighted an increase in the average value of their properties include Vukile Property Fund and Redefine.
De Goede says in general, managing fewer properties with a higher value is easier than managing more properties with a lower value per property.
“It is probably more cost-effective on the one hand and secondly one can have a better handling on the underlying tenant and the performance of the property.”
But finding good quality assets could be problematic. Templeton says property has performed very well as an asset class since the late 1990s, which means that property owners would not necessarily want to sell.
He says to develop a quality asset takes a lot of time and capital. When funds sell the asset, they have to reinvest that cash and it can be challenging to find an investment with a comparable yield, he says.
But, says Petersen, it will also depend on the size of the assets.
Relatively to bigger funds, Dipula is still targeting quite small assets, with an average value of between R20m and R400m, he says. He believes there are “sweet spots” in the market for assets between R20m and R100m, and many of their competitors will probably not be interested in those assets.
De Goede says whether funds that wish to upscale will have difficulty in obtaining quality assets will depend on its perception of a quality asset.
“Size isn’t necessarily always quality,” he says. He believes the income stream and the security of the income stream will determine the quality of the asset.
Templeton says in the present market, portfolio growth through acquisition is almost impossible with quality investment property assets difficult to come by and often overpriced because of fierce competition.
Petersen says the danger of overpaying in order to grow is “a real one”.
“Negotiations are definitely going to become more difficult, you’d be a denialist to not have seen that coming.”
But deals are not only driven by price, they are also driven by other factors, such as how desperate the party is, he says.
De Goede too believes there is a risk of overpaying for properties in this market since the cost of funding is relatively low. He says property investors in general are comparing the cost of funding with the acquisition yield of properties.
In general, listed property companies may not be looking at all the underlying dynamics of the property that they are acquiring, he says.
“The risk is there that they may be overpaying due to the cost of financing that is still cheaper than acquisition yields,” he says.