Finance: Good Opportunities exist for Offshore Investment by SA listed Property Companies
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There has been a change in the thinking of the investor community of Gauteng towards off-shore diversification in recent years, reports Brian Azizollahoff, CEO of Redefine Income Fund.
“The advantages of limited off-shore diversification have made even dilutionary acquisitions somewhat palatable as there is a mitigation of risk from a geographic concentration point of view as well as a natural Rand hedge when the local currency weakens,” notes Azizollahoff.
Historically South African property companies have been precluded from investing off-shore. Exchange control issues aside, forward yields on foreign property investments in highly developed countries such as the USA, the UK and other European centres have been far too low to be attractive to South African listed companies as the acquisition of such foreign assets would be income dilutionary to local funds which in turn would have had a negative effect on the acquirers’ share price.
What is very attractive in the current world economic climate is that there is value in the property sectors in the USA, Europe and Australia never before offered. Azizollahoff points out that yields on both direct property as well as listed property companies are at highs even above yields in South Africa.
Azizollahoff cites the movement in price of three of the largest UK REIT’s, Land Securities, Hammerson and Liberty International. “The drop in value is dramatic – up to 50% - although the net asset values have not decreased in the same proportions,” he points out.
Similarly, the performance of Westfield Group – the largest Listed Property Trust (or LPT) in Australia – which is now on a forward yield approaching 8% representing unparalleled value relative to the group’s size, quality of assets and liquidity.
When looking at the US market, one of the major REIT management companies is Cohen & Steers which manages 12 listed entities. Azizollahoff points out that two of their listed REIT’s -- Worldwide Realty Income Fund, Inc. and REIT & Preferred Income Fund, Inc. -- are trading on yields of almost 12% and 20% respectively and there are numerous other REIT’s trading on yields in excess of 10% offering US based assets in quality portfolios.
Azizollahoff notes that the significant drop in property value is by no means confined to the listed property sector and anecdotal evidence is of prime real estate in the UK trading at yields of 8% and 9% and in the rest of Europe (for example Germany) between 10% and 12%.
“From most recent IPD statistics (2007) one can extrapolate the effect that the 20% to 30% drop in values over the last six months have had on yields. What is evident is that in many countries, yields are now in excess of 7.5% on prime properties,” he explains.
The US is no different and “appetite” for property is at very low levels where, once again, anecdotal evidence is of initial yields of around 10% for prime properties in large centres.
The issue of exchange control is a complex area of law and requires each investor to take an opinion. Similarly, the ability or capacity for an investor to borrow funds off-shore will also vary from investor to investor.
“If one considers that the cost of gearing in the US, Europe and Australia is substantially below that of South Africa, utilising off-shore financing facilitates the opportunity to acquire yield accretive property investments in developed countries has arguably never been this attractive,” Azizollahoff of Gauteng concludes .
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