End of the hybrid hype?

Posted On Thursday, 30 October 2003 02:00 Published by eProp Commercial Property News
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Holding good listed stock is still preferable to cash analyst.

 Norbert SasseHybrid property loan stock company may offer good earnings in a weak listed property market but, because of the strong run by the listed sector, it may be advantageous to sell the units in other property companies and use them to buy higher yielding direct properties.

Mariette Warner, head of securitisation and fund management at Standard Bank who also heads the, says this is the best option at this point in the property cycle.

Listed asset management company Provest says in its listed property overview for September that property loan stock company Redefine Income Fund was the first listed property company to advocate a combination of direct and indirect property investment, when it listed in February 2000.

Redefine termed this type of investment vehicle a "hybrid". Another hybrid is Growthpoint Properties.

Provest uses soon-to-be-listed property loan stock Ambit, a joint initiative of Absa Bank and Marriott Holdings, as an example of a "proposed hybrid listing".

Provest says hybrids invest in other listed property stocks to increase sectoral spread, improve geographical diversification and to have greater market capitalisation, and with it increased tradability.

Another motivator is opportunities for investment in more liquid assets and more efficient cash flow and debt management. They also do so to be able to acquire assets often trading at a discount to net asset value. It also enhances earnings as a result of the acquisition of higher-yielding assets.

Provest says that during Ambit's capital raising exercise, big players in the listed property market encouraged management to rethink its strategy and downscale its listed property component.

Geoff Cannings, GM of Absa Commercial Property Finance, confirms that management is looking into downscaling the listed portion of the portfolio in favour of direct property holdings.

Cannings agrees that hybrids can be dilutionary, but says that holding good listed stock is still preferable to holding cash.

"It yields a higher return than cash. It's also much more liquid than a direct property," he says.

Warner says listed property funds should be focusing on shares that generate earnings growth to enhance returns.

However, she says the "hybrid nature" is dilutionary to earnings at this point in the property cycle because  have had such a strong run.

She says buying direct property is better for earnings at the moment and will generate higher yields.

Warner says that hybrids first came to the fore when the listed property market was weak with high yields, which was good for earnings.

She says hybrids should be selling their units in other property companies, banking their profits and using them to buy higher yielding physical property.

However, she says this is easier said than done because of a shortage of quality direct property stocks.

Norbert Sasse, an executive director of Growthpoint, says some listed property shares are offering 10% yields and are expensive.

"You can go into a physical property market and buy direct properties for better yields," he says.

However, he says Growthpoint's direct property holdings amounted to R4,8bn and that the value of their listed property shares in other funds was R800m. Sasse says that only 14,29% of their total assets are in other listed property shares.

"We're fairly happy holding onto our listed property portfolios.

"We have advantages in terms of flexibility of cash flow, liquidity and the ability to sell a physical property in exchange for units in another fund," Sasse says.

Brian Azizollahoff, CE of Redefine, says they are not purchasing listed stock because they agree with the contention that listed property stocks now trade at a premium or lower yield to direct property.

"It may well not make sense to establish a new hybrid vehicle at this time, but for those hybrids that have been around for some time. the case can be made that we picked up listed stock at large discounts to the current trading prices giving us huge capital appreciation and yields which still very much suit the Redefine investor," Azizollahoff says.

On the question of whether there is enough focus on independent research into earnings growth from hybrids, Azizollahoff says: "Redefine does not invest in all listed counters but only in about 12. We focus on these and are well informed regarding the assets under management as the managers themselves."

He says their strategy is also to base their listed portfolio on the large and solid companies.

"Redefine does not merely buy units in listed vehicles to increase its assets under management. We have not increased our listed portfolio for some time which dispels that idea completely. It can be equally said of direct property companies that they acquire assets for this reason."

Last modified on Friday, 09 May 2014 15:14

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