Offshore property grass not always greener

© carloscastilla – 123RF.com

Analysts are worried investors may buy offshore exposure at record high exchange rates, only to see some rand recovery, along with offshore price weakness.

"Investors who panicked and bought dollars in December 2001 had to wait to January 2015 to see the USD-ZAR rate at the same levels," said Alternative Real Estate Capital Management fund manager Garreth Elston.

"With the level of ZAR volatility we have witnessed over the past 30 days, it is quite natural for investors to be very skittish. But making rash decisions in a market with this level of volatility and fear can lead to bad decisions and significant investment underperformance.

"Our view is that many of the top South African real estate investment trusts have been oversold and currently offer very good investment value to those prepared to take a slightly longer-term view," he said.

Rand hedge stocks were among the top performers last year. Many offshore property companies are listing on the JSE in light of popularity among South African investors.

Intu Properties, which is listed on the JSE and is one of the largest owners of shopping malls in the UK, achieved a total return of 24.86% last year. Capital & Counties, the largest landowner in the Covent Garden district of London, achieved a total return of 56%. Meanwhile, South African bellwether Growthpoint Properties' total return in the same period was -9,99%.

Some of the larger offshore property companies listed on the JSE have proved themselves, but analysts are warning investors to be cautious about new entrants on the bourse.

Evan Robins, the listed property manager of Old Mutual Investment Group's MacroSolutions boutique, said some offshore companies might flock to the JSE because they struggled in their home markets.

"Investors who are over-keen on buying an offshore share on the JSE should know exactly what they are buying. You must ask questions about seemingly opportunistic companies raising money in SA because they can't raise it in their home market or are trying to access significantly cheaper capital in SA, which implies South African investors are paying too much," he said.

Chief investment officer at Grindrod Asset Management Ian Anderson said 2016 would probably be a difficult year for South African-focused property companies, which would experience price volatility. However, he said, some South African funds were nicely positioned from an investment point of view in the long term.

"South African investors rushing offshore now do so after the rand has already depreciated significantly and into a global landscape offering low yields and low growth rates.

"In SA, by contrast, listed property yields have increased substantially after prices fell in the fourth quarter, while dividends continued to grow well in excess of inflation," said Anderson.

"There are now a number of listed property companies in SA offering investors initial forward yields in excess of 10% and inflation-beating growth in earnings and dividends over the medium- and long-term. The next 18 to 24 months are going to be quite tough for listed property companies operating in SA and there will no doubt be a lot of price volatility during that time," he said.

"But buying listed property companies on forward yields well above inflation and the yield on 10-year government bonds will be extremely rewarding for investors with longer investment horizons," he said.

Source: Business Day