Brace yourselves

Global investors could shake up the SA listed property market in 2007. There is good reason to believe they could dominate corporate activity - mergers and acquisitions - in the sector with dramatic results. To see why, consider the confluence of factors that make listed SA property a great bet for foreign investors.

First, the world is awash with money. Globally, cross-border property investment is likely to exceed 2006's US$600bn and there is about $2 trillion in leveraged private equity funds also looking for investment opportunities.

Second, SA's listed property funds offer a current forward yield of about 8% compared with about 5% for listed property elsewhere.

"Globally, listed SA property is looking exceptionally cheap," says Investec listed property manager Angelique de Rauville. That's despite the significant bull run in the property market over the past three years. Third, yield-based assets like property funds are in hot demand.

Old Mutual property investment chief Colin Young says a wave of retiring wealthy "baby boomers" - 85m of them in America and a similar number of Europeans - is in search of investments that pay out a high-yielding monthly annuity.

"They will do this through international institutions that aren't interested in obtaining controlling stakes, but which will definitely increase the demand for local listed property scrip," says Young. "The challenge in the next few decades is to create this scrip by creating quality property investments. Assembling quality property assets rather than raising capital will be the key challenge. This is a global phenomenon with far-reaching consequences for SA."

Fourth, investing directly in SA property is no longer so easy. The usual route to SA property investment for most of the advance guard has been a holiday in Cape Town.

Russian oligarchs Roman Abramovich, Britain's second-richest man after steel magnate Lakshmi Mittal, and Boris Berezovsky are rumoured to have rented a Cape house for the summer holidays. Both like property and will almost certainly look for investment opportunities. But it's not that easy to find them. A European property tycoon who does not want to be named is looking for a property in Cape Town's Clifton. His budget is R30m-R40m. He can't find one.

Local property investor Harry Fuchs sold one of his flats in Eventide for R35m late last year. Our European tycoon approached SA industrialist Graham Beck to sell an identical one in the same building. Beck's price: R60m. The tycoon's problem is that there are many more buyers than sellers in Clifton - as with most SA property - and some industry observers are betting he'll pay the R60m. It's only Euro 6,5m or £4,3m - a bargain compared with a similar property in St Tropez or Malibu. Clifton's property supply is restricted to well below demand by its tiny area. Similarly, SA's entire property market has been stunted by 35 years of underdevelopment and doesn't have enough property to satisfy local investor demand. But why go for properties directly when listed properties offer such competitive yields? Their growing market capitalisations (driven by demand as well as growing asset values) will make it easy for foreigners to buy significant chunks of the bigger funds.

Fifth, major foreign property investors have developed a good competence in the SA market.

IFA, the Kuwaiti resort developer that owns half of Zimbali coastal resort and bought into Boschendal last year, wants more deals. The Livingstone brothers, who bought the V&A Waterfront through their London-listed vehicle, London & Regional, are also keen on further deals. So is Dubai World, the Livingstones' partner in the V&A. Australia's Macquarie Bank has spent two or three years researching the SA market. More are coming.

Those foreign players are likely to be the first to move on the listed sector. The two prime targets must be Growthpoint, the biggest fund with a market cap of R12bn, and listed asset manager Madison and its stable of ApexHi and Redefine. Retail fund Hyprop, with a combined market cap of R19bn, could be another target.

A deal for Growthpoint could be done by persuading its six biggest shareholders to sell - highly probable if they sweeten them with purchase yields of, say, 5,5%. They could do the same with Redefine's five biggest shareholders.

Globalisation will also bring opportunities for SA funds to invest offshore, and this is where an astute international investor could find an opportunity. For instance, Madison's Mark Wainer and Wolf Cesman are eager to go global, probably by buying up London-listed Ciref, where they are already the biggest shareholder. Ciref has been carefully building its global property skills under CEO Mike Watters.

An international asset manager that offers Wainer and Cesman a shortcut to the global big time in exchange for access to a large, liquid SA investment opportunity could be well received. Atterbury, which is also building offshore interests, and which has grown into SA's biggest unlisted developer, is another obvious target.

Yields could start plunging, despite our high inflation and interest rates. But global investors with their eyes firmly on the longer term will see that our relatively weak rand is nothing less than a great opportunity. Local investors in SA's listed funds will gain in the short term from the rising value of their investments as the yields fall. But they will also gain from international investment standards that demand management skills, transparency and standards of corporate governance which often seem lacking in our unruly property sector.

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