Offshore property still looks a better bet
SOUTH African property punters are still making more money offshore than in their own backyards — in both rand and dollar terms.
Latest figures from Cape-based Catalyst Fund Managers and UBS show that global property stocks, or real estate investment trusts (Reits) as they are commonly known, delivered a total return of 19% in rand and 10% in dollars for the year to date (January to September).
That compares with South African property stocks’ total return of 14% in rand and only 6% in dollars over the same time.
North America has been the best-performing Reit market so far this year, with a total return of 22% in rand and 13% in dollars.
JSE-listed rand hedge property stocks such as Romanian-focused New Europe Property Investments (Nepi), UK mall owner Intu Properties and Rockcastle Global Real Estate Company also continue to outperform most of their SA-focused peers.
Nepi and Rockcastle have notched total returns of more than 50% over the past 12 months.
The key question is whether investors who have not yet diversified their property portfolios offshore have missed the boat.
Raymond Jacobs, New York-based MD of Franklin Real Asset Advisors with a directly held property portfolio of $3.5bn under management, said on a visit to SA last week that there were still opportunities for investors to cash in on the post-crises recovery in global real estate markets.
Mr Jacobs says commercial property values in prime markets such as central London, New York and Paris have already recovered to 2007 peak levels before the credit crises sent global real estate markets crashing.
However, the smart money is now starting to chase investments in secondary markets, where there is still good value to be had.
Mr Jacobs singles out Spain and Italy, where he says investors can pick up well-located, A-grade offices and small retail buildings at yields of 6%-7%. Older stock with redevelopment potential is available at yields of 8%-9%. “That’s attractive compared to the 4%-5% that prime London property typically trades at.”
The US also offers pockets with “buy, fix and sell” potential, with plenty of distressed sellers keen to offload properties.
“We like the smaller, two-and three-star hotel market as well as multifamily rental housing portfolios. Many of these properties are typically owned by families or private investors who don’t have the capital to upgrade and refurbish.”
Mr Jacobs says the office markets of smaller US cities such as Seattle and Denver also offer good upside, with the economic recovery in these areas gaining traction.
Local analysts confirm property fundamentals now look more compelling in many offshore markets.
Stanlib head of listed property Keillen Ndlovu says while South African investors should have a mix of local and offshore property in their portfolios, offshore counters are looking more attractive in terms of yield, income growth and net asset value (NAV).
He says global listed property is still trading at a discount to NAV while local property stocks are trading at a premium.
“We expect NAV to grow faster in offshore markets given the higher potential for rental growth and limited amount of new developments coming on stream compared with SA.”
CoroCap fund manager Daniel Ross says certain real estate sectors in developed markets are benefiting from a combination of supply constraints, historically high spreads between bond and property yields, and rising rentals.
“This perfect storm is assisting the valuations of global Reits, which is making offshore property stocks more attractive over a 12-to 24-month horizon than pure SA-based property portfolios.
“As a bonus, the weakening rand will provide an additional kicker to returns.”
Mr Ross says CoroCap favours residential and high-end retail in central London and on the east coast of Australia.
“The obvious JSE-listed offshore plays in these geographies are UK-based Capital & Counties Properties and Investec Australia Property Fund.”
