Over the past few years, JSE-listed property funds have been actively pursuing international geographic expansion – in an attempt to diversify portfolios and hedge against rand weakness. These investments have done particularly well for local funds. What we’ve witnessed over the past two years is an acceleration of this offshore expansion – and it looks set to continue.
The current economic and operating environment in South Africa – characterised by sluggish GDP growth, rising operating costs, struggling consumers, low employment figures and depressed business confidence – is far from ideal for listed property to perform well locally.
The contractual nature of the landlord-tenant relationship also plays a role – as a result, listed property companies tend to lag behind the underlying operating environment by between 18 and 24 months, sometimes longer. We believe the operating environment has now caught up, however, and we’re likely to start seeing increasing vacancies, a pushback in rental escalations, and tenant churn. Coupled with an oversupply of office, retail and industrial space within specific nodes, this doesn’t bode well for future investment returns as distribution and net asset value growth slows.
The operating and economic environment offshore, however, has attracted the interest of local property stocks as it offers greater potential returns. In certain regions, economies are showing signs of early recovery, with an uplift in demand for space and an increase in consumer appetite. Infrastructure and operating costs are relatively more stable, which allows firms to act on longer-term investment views.
The two main drivers for the trend towards offshore exposure are:
Property yields offshore are higher than current lending rates – also known as ‘positive spread’.
The improved property fundamentals provide greater certainty.
In South Africa, property yields are lower than current lending rates, which is described as experiencing a ‘negative spread’ environment. To try and mitigate this, annual rental escalations tend to exceed inflation. When companies value potential developments or acquisitions, they assume tenants will be able to continue paying above-inflation escalations, which in turn makes the development or acquisition feasible at given yields and lending rates. The question of sustainability of course then arises, given that landlords are pushing already pressed tenants for higher escalations.
A big offshore drawcard for local property firms is that with the use of leverage, the investment is ‘in-the-money’ from the get-go and won’t be reliant on rental income growth. What we’re also seeing abroad is that tenants are willing and able to sign longer lease terms with inflation-indexed escalations – we attribute this to greater economic and political certainty in those countries.
It’s important to note that it’s not just been our local property stocks that have spotted these opportunities – a number of global firms are also following the trend. Competition has seen a compression of yield, but the spread remains due to the artificially low interest rate environment.
Some JSE-listed property funds have succeeded in identifying these trends early on and have captured significant value by acquiring and/or developing offshore exposure. Naturally, there will always be the opportunistic trend followers who are late to the party and end up paying for their investments.
At Sanlam Private Wealth (SPW), our view has been to invest with management teams who have experience abroad, are specialists in their given sectors, and have managed their balance sheets pragmatically. Management teams must be aware of the nature and quality of their assets and have a competitive understanding of the market in which they operate if they are to succeed.
It’s also important to note that all is not doom and gloom in the local property environment. Property is a cyclical business and the current weakness could provide us with opportunities to invest at attractive yields. Ultimately, what makes a good investment, whether offshore or local, is the price you pay.
We can assist you with
Discretionary investment management
Sanlam Private Wealth manages a comprehensive range of multi-asset (balanced) and equity portfolios across different risk categories.
Our team of world-class professionals can design a personalised offshore investment strategy to help diversify your portfolio.
Our customised Shariah portfolios combine our investment expertise with the wisdom of an independent Shariah board comprising senior Ulama.
Outsourced investment service
We collaborate with third-party providers to offer collective investments, private equity, hedge funds and structured products.
Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.