South African Real Estate Investment Trusts (REITs) have proven their ability to operate successfully on the international stage
Over the past decade, South African Real Estate Investment Trusts (REITs) have proven their ability to operate successfully on the international stage in almost any market in the world, but they are still not truly global property players. However, the day they can stand among the number of global REITs may not be far off.
The South African listed property sector has been on a globalisation charge in recent years, and Estienne de Klerk, chief executive of Growthpoint Properties SA, says it now has exposure in more than 25 countries, and nearly 45% of the FTSE/JSE SAPY Index earnings come from outside South Africa.
Some REITs have also built representative businesses in specific markets.
“NEPI Rockcastle is the largest real estate firm in Central and Eastern Europe (CEE) and Growthpoint Properties Australia is now the 11th largest REIT on the ASX. The continued growth of these kinds of platforms will make the South African market even more relevant on a global scale.”
South Africa’s strong asset management and institutional investment market make it attractive to foreign property businesses, and it has lured several inward listings of mainly European firms. South African REITs are market anchors in Africa as an investment destination.
As such, global player status can be achieved. Len van Niekerk, senior property analyst of global markets at Nedbank, says some of the most prominent REITs are on the global stage. He says for REITs, investing outside South Africa is more than a matter of acquiring properties. Companies have to build sustainable local business platforms in these new countries. The REITs that have ventured offshore have not found a single method of doing this. However, it is most often achieved through a local partnership and development boots on the ground.
“South African real estate investors have made their presence most felt in CEE but are largely irrelevant in the developed markets of Europe, UK, and North America and Asia. South African companies can’t compete when it comes to asset size in international markets, but many can compete toe-to-toe when it comes to development and asset management skills.
“Being entrepreneurial and creating great returns are things South African REITs are far more interested in than simply the size of assets under management.”
Van Niekerk expects most new capital, debt and equity raised by local REITs to continue to be invested outside South Africa for the foreseeable future.
“International markets offer attractive initial yield spreads, which is the gap between the yield on the investment and cost of debt. Offshore investment destinations also have higher GDP growth rates than South Africa; notably CEE, which has attracted the most from South African REITs and has a forecast GDP growth rate of 3% to 3.5% a year over the next three years compared with 1.6% for SA.”
The country’s economic environment is also contributing to REITs investing offshore. While current business confidence could be described as cautiously optimistic, many investment decisions are still awaiting the removal of policy uncertainty and implementation of structural changes. The oversupply of real estate relative to tenant demand and the weak economy means conditions in the local real estate sector will remain tough for some time.
Van Niekerk says: “Other than economic and political reasons for investing outside South Africa, international investment is a natural evolution and diversification of a growing sector looking for new markets and investment opportunities.”
The quality of several South African REITs businesses – the management, balance sheet, and assets – are comparable to many global developed market REITs, says Jamie Boyes, director and portfolio manager at Catalyst Fund Managers.
“The market has changed over the past five to 10 years. I expect South African REITs to continue to garner interest from non-South African investors who are looking for opportunities outside their traditional basket of investments.
“As other emerging markets become more established mature businesses, investment interest into emerging market REITs is likely to grow.”