Rush into global deals

Falling yields, stronger rand, greater confidence set property's revolving door spinning

South African property is going global as the flow of investment funds in and out of the country gathers momentum.

What is helping to fuel the surge is that an increasing number of large private equity funds are scouring SA for opportunities. And the tide of SA investors buying property offshore is about to turn, too.

South Africans lost interest in investing overseas a few years ago when property prices subsided in their favourite countries - mainly Britain and Australia - and the SA residential market boomed. But local investment yields have fallen to near international levels; a strong rand has made offshore property cheaper; and last Wednesday government increased the foreign investment allowance for individuals from R750 000 to R2m.

A South African can now pay cash for the average British or Australian house. And a couple of them can almost pay cash for the average home in London or Sydney. Or buy into a private equity fund invested in German retail sites that gives a cash-on-cash yield of over 7%, as good as top SA-listed funds are offering.

Attention will be focused for the moment on the flow of property investment funds into SA. A number of large private equity companies suddenly started looking for investment opportunities in SA late last year.

They will join pioneer investors who started moving in five years ago.

Fleming Family & Partners has assembled a portfolio of properties in central Johannesburg. Frank Gormley, head of Irish-listed developer Howard Holdings, is developing Mandela Rhodes Place in Cape Town. And Cyprus-based Allan Collier set up Property Partners with SA dealmaker Stuart Chait to place offshore investment in large SA projects such as Melrose Arch.

The coming second wave of investment is driven by poor returns on traditional equity and debt investments. It has already diverted large US opportunity funds and European private equity companies into the more risky markets of the Far East and Eastern Europe.

Property researchers and economists have spread out with them, improving the flow of data they rely on to make their investment decisions. But property yields in many of the emerging economies have started to converge with those in Europe, America and Australasia.

They have woken up to SA's stability, its resources boom and economic growth that will outperform many other countries that normally attract their capital. They can also get improved data on SA property, mainly through the internationally standardised Investment Property Databank (IPD), which now has 10 years of information on SA property performance.

Multinational corporations are also once more expanding their presence in SA, which is helping to persuade the global property service companies. The world's second-biggest such company, Jones Lang Lasalle, will start operating this year in association with local chartered surveyor John Murray. It will also start reporting in more detail on SA, which will add to the country's investment attraction.

One UK private equity fund has let the property industry know that it has £100m (R1,050bn) to invest in projects.

"We have a war chest of £250m [R2,65bn] in equity from our international partners," says Chait. "That gives us fire power of about R9bn once we add borrowings."

But finding investments is a problem. SA property still suffers from 30 years of underdevelopment and is short of investment property. Local listed property funds, institutions and entrepreneurs have pushed yields close to international levels as they fight each other for the relatively few good properties available.

"Most international investors have been disappointed by the low returns on our property market," says Chait. "They were hoping for the 10%-plus yields they have been getting in highly risky markets such as Russia, where you can never be sure that you actually own your property.

"But a good shopping centre goes for less than 7% these days, a prime office building for 8% and residential property is sub-5%."

Chait is relying on "brown field" redevelopment of existing large projects to create the super yields his private equity partners seek.

Returns are not so exciting for South Africans beginning to spread their wings overseas, either. The exception seems to be SA-owned UK private equity boutique Credo, with its latest European fund. With a minimum £50 000 (R502 500), SA investors can buy into a portfolio of 15 UK Hilton Hotels, 13 German Burger Kings and four Peugeot showrooms. They give a cash-on-cash return of at least 7%.

Another choice is Ciref, the soon-to-be London Stock Exchange-listed retail and office property trust being launched by Corovest's UK arm, and in which Redefine is expected to take a major stake.

"Investors can expect a 4,5% return on the issue price of the shares," says Corovest CEO Mike Watters. "But we are also expecting about 7% growth in payouts over the years."

The fund should launch with a market capitalisation of about £30m (R315m).

Property education and investment company YDL will soon launch a tax-efficient Polish residential fund that aims to give investors a capital growth-only return over 10 years as Poland converges with its European Union partners.

Article by: Ian Fife - http://free.financialmail.co.za