Consolidation in the listed property sector is being stalled by volatile markets, with investors reluctant to sell their stock at existing prices.
Commentators believe the shareholders of target companies are likely to demand prices much closer to net asset value (NAV), but with many real estate investment trusts (Reits) trading at discounts to NAV, there are few companies in a position to consolidate. In fact, one analyst believes some companies may actually even opt to delist and become private funds.
“I think it’s taking companies a little time to change gears. Up until quite recently, capital allocations decisions were quite easy: raise debt or equity or a combination of the two and buy properties or property portfolios,” said Grindrod Asset Management’s chief investment officer, Ian Anderson.
“Now most management teams should be selling properties to pay down debt and/or buy back shares. I think price volatility is too high across the sector for companies to be thinking about consolidation and shareholders of target companies are likely to demand prices much closer to NAV.
“I would expect a couple of our listed property companies to be taken private in the months ahead, a trend that is already happening in the US, where Reits are also trading at discounts to NAV,” he said.
However, some analysts have said that many companies in SA would wait out difficult operating conditions.
“I think there are too many benefits for listed property companies which have become Reits, to consider delisting. The South African listed property sector is still relatively young. It remains extremely capital-intensive and to get that capital, you have to be listed. Further, the average listed property group gets better credit terms from banks than the average unlisted one does,” said Maurice Shapiro, fund manager at Ma’alot Investments.
Evan Robins of Old Mutual Investment Group said South African Reits values had not adjusted to market conditions and many might be overvalued. When they had adjusted, they may not be trading at discounts to NAV any more.
“In international markets, the insight is correct that when share prices fall below NAV, as they are now in SA, smart operators try to buy out Reits and take firms private, which is cheaper than buying the physical assets by themselves and they can try to sell the buildings to make a profit,” he said.
“However, in our market, valuations still need to adjust downward to reflect the new environment so property company NAVs may be overstated until property catches up with the developments in the capital markets over the last few months. This could take a year or two,” Mr Robins said.