Experts nervous as SA's property funds go abroad

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Tower's first foray into Croatia, through a partnership with VMD Grupa, a Croatian shopping centre developer, has seen it gain a portion of the VMD KVART office building in capital city Zagreb for R321m. Tower, a relatively small company with a market capitalisation of about R2bn, concluded the acquisition at the end of last month.

It was made through Tower's newly launched Croatian subsidiary, Tower Europe, which now holds ownership of 15 of the building's 26 floors.

Tower is the latest South African property fund to enter Eastern Europe, after New Europe Property Investments (Nepi), which owns malls in Romania, and Rockcastle Global Real Estate, which is investing in malls in Poland.

Unlike Nepi, which has no assets in SA, and Rockcastle, whose main focus is Poland and secondary focus African countries excluding SA, Tower has a large portion of its investments in SA.

Tower CEO Marc Edwards said he was attracted to the premium properties in the country that were at 15-year lows.

This compared favourably with South African properties that were relatively "much more expensive", Edwards said.

As part of the deal, VMD Grupa acquired a 20% stake in Tower Europe. VMD's services subsidiary will manage Tower Europe's Croatian assets.

Analysts are wary, saying South African property funds may be overly ambitious investing in regions they do not have great knowledge of.

They do not want funds to invest abroad at the expense of their local operations. "It does not add obvious value to investors, who have a number of avenues for diversification, for smaller funds to sacrifice focus on the market they are expert in and buy into markets of which they have limited knowledge," Old Mutual Investment Group SA portfolio manager Evan Robins said.

"Croatia may offer great opportunities but I think the market will need to be convinced that South African property funds can buy well in markets in which they are not expert.

"We have seen a number of smaller to mid-cap funds - for example, Texton and Rebosis - diluting a focused proposition to venture offshore into competitive markets. These moves may reflect more the fund's concerns about local fundamentals than the attraction of the offshore investments in themselves."

Texton Property Fund and Rebosis Property Fund have added UK malls to their South African-focused portfolios.

Catalyst Fund Managers investment manager Paul Duncan said offshore acquisitions were becoming increasingly attractive for many South African funds.

"Property fundamentals in SA remain challenging and management teams are battling to drive organic earnings growth. The other means to drive earnings growth is by inorganic means, that is by accretive acquisition or disposals," Duncan said.

He said offshore markets generally had a positive spread between real estate cap rates and funding costs. But long-term investors were concerned earnings accretion would be achieved at the expense of portfolio quality.

Duncan said it needed to be noted that Tower had a Croatian partner.

"Tower do appear to have partnered with a local specialist operator who has retained a meaningful stake in the asset. This does provide some comfort that they are not simply an exit for the local specialist," he said.

Source: Business Day