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SIM Property Fund  |  South African-Real Estate-General
23.9062    -0.0809    (-0.337%)
NAV price (ZAR) Mon 30 Jun 2025 (change prev day)


SIM Property comment - Mar 13 - Fund Manager Comment03 Jun 2013
Market Review
The SA Listed Property Index (SAPY) returned a total of 7.09% in the first quarter of 2013, continuing the strong 2012 performance (36% total return). This represents about 5.5% outperformance over general equity (ALSI) during the first quarter of the year. Some of the strongest index performers during the quarter were NEPI (+24%), SA Corporate (+18%), HospitalityA (+12%) and Growthpoint (+11%), while some of the weaker performers were Hyprop (flat), Sycom (+3%), Resilient (+5%) and Capital Property Fund (+5%). High levels of corporate activity have become a norm in the listed property sector. During the quarter, the most significant of these was Redefine (RDF) and Growthpoint (GRT) continuing their 2012 aggressive bidding war for Fountainhead(FPT). This finally ended in RDF withdrawing its bid and instead acquiring close to 45% of FPT units via the market, facilitated by using its Hyprop (HYP) units as currency in an accelerated offer directly to FPT shareholders. This has effectively blocked out GRT's offer due to RDF's now material shareholding in FPT.

What SIM did
During the first quarter, the SIM Property Fund initiated an investment of close to 1% of the Fund in Delta Property Fund by participating in a private placement. The share trades at a yield in excess of 9% versus the sector/SAPY average's 6.5%. Its BEE credentials mean that its assets are heavily weighted to government tenanted properties, with very long-term leases, low vacancies, and rentals escalating contractually at 8%-plus a year, which provides a strong underpin to CPI-beating expected growth in distributions. Taking a long-term view, we believe a track record of real (above CPI)distribution growth combined with improving liquidity, as the fund grows its assets, will aid a rerating to a narrower yield spread versus the sector from almost 3% at the purchase price. The share thus offers a very favourable long-term expected total return taking into account the high initial yield, real expected distribution growth and rerating potential. Based on similar reasoning, we followed our rights in a Rebosis capital raise, and bought further shares in the market at yields exceeding 8% to take the Fund's stake in Rebosis to 3%. We also initiated an investment in NEPI (New Europe Property Investments) and have thus far invested close to 1.5% of the Fund in this share. While listed in SA and part of the SAPY benchmark, its assets are predominantly in Romania, with rentals denominated in Euro. It yields about 4.5% forward, which is low in the SA context but we believe its growth prospects are greater and it is a rand-hedge given Euro-denominated rentals. Briefly, Romania is in the early stages of its property development cycle, meaning NEPI has many value-creating acquisitions (about 8% yields) and development(about 10% yields) opportunities relative to a cost of funding of below 5%. It also serves as a useful currency hedge for the fund given that its rentals are denominated in Euro, while the rest of the SIM Property Funds holdings all have rand-denominated rentals. Finally, because of its listing in SA and a very strong equity investor base including other SA listed property funds such as Resilient, Capitaland Fortress, equity capital to fund acquisitions/developments is more readily available for NEPI, which in turn allows for easier access to cheap debt capital within the Euro region, while its competitors, including private players, in Romania are struggling to obtain debt funding. In line with our previous commentaries, we continued to use relative strength or outperformance of some of our higher yielding smaller and mid cap overweights (such as Hospitality A, SA Corporate) during the period as an opportunity to reduce these bets, and accordingly redeployed that capital into some of the counters that had weaker performance, such as Capital Property Fund, Hyprop, Resilient and Acucap.

Outlook
SA listed properties' imminent potential inclusion in Global REITS indices could be a factor that has continued to drive demand, particularly foreign demand, for our listed property even at these more expensive levels. Further, these levels still likely represent a material yield pick-up for foreign investors relative to their own bonds and listed property. The risk for them is their own currency appreciation against ours (i.e. rand weakening), which could erode much or all of this advantage. Nevertheless, at current price levels, we consider listed property to be in the slightly expensive range, yielding 6.5% forward versus what we believe is a fair sector yield of 7%. We thus continue to caution against listed property investors expecting similarly high total returns for the listed property sector for the rest of 2013 and beyond, as was earned in 2012 and for the first quarter of 2013. We continue to believe that the prospects for a further rerating to even lower yields from the current forward yield of 6.5% is slim (on a sustainable basis at least, but it's certainly not impossible for a short period where sentiment rather than value can drive markets!). Thus, as highlighted in a previous commentary, the expected listed property total return from current price levels over a longer through-the-cycle term collapses to just the forward yield (6.5%) + long-term expected distribution growth (4% - 6% a year) = 10.5% a year - 12.5% a year, with a further positive re-rating contribution that was earned in 2012 highly unlikely. This is nevertheless still a very attractive longer term real return expectation, particular for pensioner's/retirees with lower risk appetites and favourable tax positions, given expected CPI in the 5% - 6% a year range. On a shorter term view, the odds are weighted, in our view, towards a potential derating, particularly should local bond yields rise from what we see as expensive levels. A trigger could be if foreign bond investors turn net sellers after being heavy net buyers in 2012. A short-term sell-off should be seen as a desirable outcome for prospective listed property investors, or those wanting to add further to their current listed property investments, as such a sell-off could enable investors to buy listed property at cheaper/fairer levels again (yields above 7%). The SIM Property Fund continues to be overweight higher yielding smaller/mid-caps (with low foreign ownership/liquidity and little inclusion in major indices) and underweight low yielding larger caps (with higher foreign ownership, higher liquidity and wider inclusion in major indices), which we believe will also serve as somewhat of a hedge in the event of a short-term sell off in SAPY.
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