Good buy opportunities in the SA property sect

Right now, says Mike Flax, the Executive Director of Redefine Properties responsible for acquisitions and mergers, the South African property sector presents companies like Redefine with a scenario that is extremely favourable for accretive deals capable of enhancing a property company’s bottom line.

“Several factors,” said Flax, “have come together to create good buy opportunities for a group like Redefine which has both cash and credit resources on tap.

“Firstly, many of those landlords who built their portfolios on debt are now under pressure from the banks to de-leverage and have been forced to dispose of properties at below market value. This obviously works in favour of those companies able to buy right now.

“Secondly, the listed property sector has performed far better than most anticipated and at Redefine this has resulted in the share price rising 8,5% in the first quarter of the year (against 5,5% for the overall listed property index).

“This, in turn, means that the capitalisation rate on our Redefine units is lower than the yield obtainable on quality, available properties, making it logical for us to place our stock and build the property portfolio. The net “profit” on these transactions ultimately, of course, goes to the shareholders.”

Redefine, said Flax, could spend up to R8 billion on acquisitions in the next 12 months. This figure could include the probable incorporation of Hyprop with its high value portfolio containing such properties as Canal Walk, Hyde Park Centre, Rosebank Mall and The Glen Shopping Centre.

As already announced, the acquisitions will be partially funded by “streamlining the current portfolio”. Redefine plans to sell off some 40% of its total stock, getting rid of the smaller, less profitable properties and focusing on fewer, larger, quality ‘A’ grade complexes.

“It could,” said Flax, “be argued that, as we are still in a post-recession phase with little likelihood of an upturn in the immediate future, this is not a good time to be selling any property - but the truth is that we are getting above book value on our smaller assets. The reason for this is that these are often attractive to private investors and to owner-users.”

The “cleaning out” of Redefine’s portfolio, added Flax, will work to the advantage of the company’s property management team who will take on full responsibility for the portfolio at the end of 2010. Their lives, said Flax, will be simplified and they will be able to be more efficient by having fewer properties to manage.

Asked if the planned acquisitions will involve significant debt on Redefine’s part, Flax said that initially the company could increase its borrowings but this, he said, will not raise its gearing percentage rate above the low 30’s at which it now stands.

“It has been said that Redefine’s skill in capital markets is one of the reasons why it is now a top performing JSE listed company,” said Flax. “This skill is particularly necessary now because in my view the strong bounce-back in the economy predicted for this year by some will not take place until late 2011/early 2012.”

Redefine, said Flax, nevertheless expects above average growth this year as a result of its acquisitions strategy. An important contributor here will be their growing offshore assets in Ciref Plc. These are now valued in excess of R1 billion. Ciref has a strategic stake in the Australian listed Cromwell A-REIT and Wichford Plc.

The recent change in the Australian withholding tax, which has reduced the tax on dividends for foreign investors from 30% to 7,5%, will make a significant difference to the dividend paid back to Redefine’s shareholders, said Flax.

Article by: www.redefine.co.za