Transactional activity slowed down in 2022, with the focus for most of the locally listed property companies remaining on disposing of non-core assets to improve their balance sheets. The high cost of capital, in the form of high equity yields and rising interest rate costs, make any transaction or development difficult to finance and therefore disposals remain the best way to execute on stated strategies. This has led to listed funds being net sellers in 2022.
Net acquisitions (South African Rand R’bn)
Source: MSCI; Real Capital Analytics. South Africa Commercial Transactions, Closed Deals €5m+. Data in South African Rand. as at 10 October 2022
According to MSCI, the areas that saw more transaction activity in 2022 were the industrial sector as well as general development sites. There was a significant drop in office activity and fewer transactions in the retail sector. This follows the relative performance seen in the various sectors with demand for good quality industrial space proving robust, office vacancies remaining high and retail in South Africa recovering from the effects of the Covid lockdowns.
Transaction activity per sector
Source: MSCI; Real Capital Analytics. South Africa Commercial Transactions, Closed Deals €5m+. Data in South African Rand. Data as at 10 October 2022
Given the evidenced transactional activity in 2022, i.e., more sellers than buyers, we could see capitalisation (“Cap”) rate expansions, which we expect to see materialise in the office sector and possibly in certain retail segments, leading to valuation write downs. We saw SA valuations increase marginally in 2022 across the reporting companies with improving trading metrics, following the extensive write-downs during the pandemic.
Most of the property transaction activity in 2022 occurred abroad. From 2016, SA investors looked more offshore than locally for acquisition opportunities in order to diversify their portfolios into growth regions with Central and Eastern Europe (“CEE”) drawing significant investment while the SA market faced political uncertainty and sluggish economic growth. CEE has attracted South African investors with its economic growth and growing consumer spend that makes retail tenants willing to pay high rents for prime retail space in key locations. Growth in rent per square meter in CEE (Nepi Rockcastle & Mas) has exceeded that of European peers. The fundamentals are improving, with Romania in particular, having a low retail property penetration level, low online sales levels and salaries in the CEE region moving in line with inflation to support ongoing superior growth.
Below we highlight the current geographic split for the SA Listed Property Index – SAPY versus the split at December 2016.
Source: Company data, Catalyst Fund Managers 31 December 2022
Offshore transactions in 2022 include:
- Hyprop acquired four retail properties in South-East Europe from Hystead for a purchase consideration of €193m.
- In the UK, Equites Newlands Group Limited (“ENGL”), the venture with Newlands Property Developments LLP (“Newlands”), completed its first development; being a last-mile logistics facility tenanted by Amazon on a 15-year lease with a capital value of R1 billion. ENGL is also in the final stages of completing its second development, a super-hub distribution facility let to Hermes (which recently changed its name to Evri), significantly adding to the scale of the UK portfolio. The property’s expected capital value is c. R2 billion and is let to Hermes (Evri) on a 20-year lease.
- Mas Real Estate acquired 6 Romanian retail properties from its development joint venture in which it currently owns 40% for a consideration of €320m.
- Fortress acquired its third Polish logistics asset, MDC2 Park Łódź South, located south of Łódź in central Poland. This distribution centre will be located south of Łódź and will offer a leasable area up to 80,000 sqm of sustainable logistics space, the completion of which is planned for Q3 2023.
- Maciej Tuszyński, Managing Director Europe at Fortress REIT Limited, said, “We are extremely happy to have acquired this asset, as it perfectly fits our strategic investment profile. MDC2 Park Łódź South will provide the highest standard for a modern big-box logistics facility and will include solutions addressing environmentally responsible as well as sustainable building features sought for by the tenants.”
- In May 2022, Emira Property Fund, together with its US investment partner, the Rainier Group, acquired its twelfth grocery-anchored open-air shopping centre in the USA. Emira’s equity investment in the US is currently at R2.2bn.
- Resilient acquired 15% of Lighthouse Properties’ French retail portfolio at NAV, resulting in Lighthouse creating capacity for future acquisitions in France.
- Nepi Rockcastle announced the acquisition of two transactions in Poland, namely Copernicus Shopping Centre and Forum Gdansk Shopping Centre in Poland (one of the biggest single asset shopping centre transactions by value in Europe in 2022).
Further to the offshore activity, there was some notable activity in the mergers and acquisition space including:
- Vukile’s 88% held subsidiary Castellana Properties acquired a 21.7% shareholding in Lar España Real Estate SOCIMI. Lar España is a leading, Madrid-stock exchange-listed, 100% retail-focused Spanish SOCIMI which owns a portfolio of 14 retail assets with 551 405m² of total GLA. The acquisition was at a 9%-11% FFO yield.
- Irongate Group (formerly IAP) received a non-binding offer, from a managed partnership between Dutch pension fund PGGM and Charter Hall to acquire all of the stapled securities in IAP for A$1.90 cash per IAP stapled security representing a 21% premium to Irongate’s closing price on January 28, 2022, just before the offer was announced. IAP resultantly was bought out and delisted from the JSE in July 2022.
- Shaftesbury shareholders approved the Capco merger with the deal expected to be complete by the end of Q1 2023. The merger of two of London’s biggest property companies will comprise circa 2.9 million square feet of lettable space in high-profile destinations in London’s West End.
We expect to see fewer transactions in the short term, given the high cost of capital making accretive deals hard to find, however, there is potential for further M&A activity through share swaps considering where stock prices are currently trading including the likes of Induplace and Fairvest and potentially between Hammerson, Lighthouse and Resilient. Higher bond yields and net disposals, translating into cap rate expansions, will put further pressure on balance sheets, especially for those with committed capex plans. In certain segments, however, we expect the impact on valuations to be offset by rental growth due to higher inflation and slightly improving property fundamentals, as recently evidenced by Vukile/Castellana retail property valuations and Equites industrial properties in UK. Companies with conservative balance sheets are positioned to take advantage of any opportunistic properties coming to market at attractive yields versus current book values. For less conservatively managed companies, disposals at a discount, dividend reductions or equity raises may be increasingly warranted in 2023.
