COMPANY COMMENT: Offshore property funds; Shaft Sinkers
OFFSHORE property funds should outpace most local property funds in terms of capital growth this year. Many developed countries’ property markets are offering developers low interest rates amid increasing economic growth, while SA is expected to struggle to grow and a number of property funds here will be beset with high operating costs.
In addition, interest rates are expected to rise in SA this year, putting pressure on bond prices.
A lack of business confidence in SA, caused partly by electricity supply problems, means some domestic property funds will struggle to get the most of out of their assets.
However, South African investors have shown interest in funds that are exposed to offshore property. These are to markets such as Germany, which has a burgeoning rental-based residential market, and parts of emerging Europe including Poland and Romania. Some work as rand hedges while others are achieving meaningful capital growth. New Europe Property Investments, for example, is the dominant shopping centre owner in Romania, owns assets in Slovakia and is considering Hungary as a market.
Some such funds are embracing the JSE. On Tuesday, New Frontier Properties, which will not own South African investments, said it would list this month. But some of the offshore property companies’ shares have run hard already, and while SA’s property sector is expected to generate reduced returns of 8%-12% for the year, this still beats consumer price inflation of 5.8% handsomely.
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SHAFT Sinkers, an important developer of new mining shafts, has got itself into all kinds of trouble, some of its own making and some due to circumstances beyond its control. The five-month strike in SA’s platinum sector in the first half of last year was particularly damaging because the bulk of London-listed Shaft Sinkers’ contracts were in the sector. But it has also run up hefty legal bills in an arbitration process against Russia’s Euro Chem, which is claiming about $1bn alleging a cover-up of faulty work at a new potash mine, which Shaft Sinkers strongly denies.
It is the combination of about £4m in legal fees, a sharp reduction in revenue because of the strike and operational issues at other projects that has left Shaft Sinkers with its back to the wall. It has now failed to repay £2.9m on a Standard Bank loan, and its CEO and chief financial officer have stepped down.
The company has struggled since the first half of last year to raise more than £9m to repay loans and inject urgently needed working capital into the company. Unsurprisingly, the share price has fallen sharply to little more than 2p. Four years ago it was nudging 400p. If the arbitration goes against Shaft Sinkers, the company will be finished. The Standard Bank loan is secured against its property and equipment.
