An interesting trend has recently emerged of UK property companies packing their bags and bringing their investment cases to South Africa.
The Johannesburg Stock Exchange’s exposure to the UK property sector, and the sterling opportunity it offers, is growing. Capital & Regional was one of four foreign property companies that made its debut on the JSE in the past 12 months. It took on a secondary listing towards the end of last year to broaden its shareholder base and improve liquidity.
The South African investment community has also attracted the attention of a number of other significant UK-listed companies looking to expand their investor base. Hammerson is also following the trend to list in South Africa as it announced this week. This is the largest new listing to date.
Redefine International was one of the early movers and has been dual-listed on the JSE and LSE since 2010. We followed in the footsteps of the original dual-listed property company, Liberty International, which was spun out of its South African parent, Liberty Insurance, and so already had roots there. Liberty International went on to split, forming the REIT Intu, which is dual-listed on the JSE and LSE, and Capital & Counties, which is more of a development play versus Intu’s income focus.
So what is it that makes South Africa such a destination of choice for property companies, and is this something we can expect to see more of in the future? After all, there is no downside other than having to meet the obligations of another regulator in the JSE.
Well, in part, it is a bit like mining in Canada, where a lot companies in that sector have listings simply because there is a traditionally strong appetite for mining and resources among Canadian investors. South Africa has a sophisticated listed property market; the investors there understand property and know the sector well, so it is relatively easy for property companies to gain traction when looking to raise capital.
Moreover, the rand has been performing badly for a whole host of socio-economic and political reasons, and this situation has only increased the South African hunger for exposure to foreign currencies.
And while there are options for this across multiple sectors – Mondi, Anglo-American and BHP Billiton, for example – property is the sector that has performed the best, relative to other sectors and equities, in this low interest rate environment. In the search for yield, property has won out.
The South Africans are, generally, less worried about NAV and total return, focusing much more on sustainable and growing income streams, so quality and visibility of income is key. As a result of, and as an offset to, the developing trend in point, there is some evidence that investor fatigue is beginning to set in to the market and that the strength of appetite for foreign real estate companies has dwindled over the past 12 months. With more choice on offer from UK and other foreign property companies, South African investors are becoming more discerning in their investment decisions and are taking a much firmer view as to a company’s long-term prospects.
What this means for UK property companies and whether the trend of JSE listings will continue or is sustainable, is difficult to say. South Africa will continue to provide a source of capital, but whether investors there are open to embracing a whole lot of new, smaller, less liquid and potentially more risky investments is hard to say. Will the scope for larger-cap companies to dual-list remain? Probably; but do they need to, given they can likely raise capital anyway? Probably not.
The fact is that real estate as an asset class is now an international playground; capital comes from a lot of places and goes to a lot of places, so you have South Africans investing in the UK now, but if the UK is not offering the right return, investors will look elsewhere.
It’s a good discipline for international property markets – if you can attract international capital, great, but you will have to deliver in order to retain it. Capital is mobile and the UK must remain competitive, whether from a returns perspective, growth perspective or tax perspective, because there are other options.
Right now the UK property market is a hot spot, but unless the returns justify the investment, investors, including the South Africans, will look elsewhere.