Growthpoint has once again lived up to its name in the past year, growing its market capitalisation from more than R8bn to nearly R15bn - close to 50% more than the second-largest property fund, ApexHi's R10bn.
Given its size and liquidity, it is likely to benefit most from foreign investors looking to invest in SA listed property.
There has been increasing activity on this front, and Growthpoint's foreign shareholding has increased in the past six months from less than 2% to nearer 5%. It is quite possible that this percentage could double again to 10% in the next 12 months.
The company will undoubtedly be among the first to convert from its current structure as a property loan stock company to a real estate investment trust (Reit) - the American form of listed property fund.
There is little difference between the two types, but being exactly like a Reit and using its terminology will give Growthpoint access to investors around the world who will be able to compare it with Reits from Finland to Brazil and India.
Growthpoint has lived up to its name in recent years, growing aggressively through acquisition. In the past year, it has bedded down the industrial portfolio of Metboard, as well as acquiring the R1,4bn Tresso 2 portfolio at an attractive yield of 9%.
In addition, the fund is in the process of acquiring 100% of Paramount Property Fund, which will increase Growthpoint's exposure to Cape Town from 15% to 20%. Growthpoint's sectoral exposures will then change marginally to 39% retail, 39% office and 22% industrial.
Offices are expected to show a much improved performance in the medium term, coming off a low base, while industrial property is expected to continue performing strongly. The growth in retail rents is likely to slow marginally.
Given the size and liquidity of Growthpoint's balance sheet, it has benefited from the issuance of four tranches of low-cost funding worth R4,3bn under its Commercial Mortgage Backed Securitisation (CMBS) programme. The fund continues to enjoy interest savings resulting from this programme.
Growthpoint is managed by an external management company, Investec Property Group (IPG). There is a risk of a potential conflict of interest between shareholders and the management company, particularly as IPG is an active property developer which sells its products to listed funds and institutions for profit. But this risk is reduced because Investec (asset management and employee benefits) is the largest shareholder at 13,1%.
Last year, a black economic empowerment consortium acquired a 14,2% interest in Growthpoint without diluting existing unit holders. This transaction has made Growthpoint one of the most empowered of the larger listed property funds. This has now been diluted to 10,6% as Growthpoint has continued its headlong absorption of properties, which is still significant given the fund's growth and size.
CEO Norbert Sasse has set his sights on Growthpoint being a classic large listed property fund, providing investors with steady, predictably growing payouts over the long term. This is what the large investors want and as Growthpoint moves into the Alsi 100, and perhaps eventually 40, it will be rerated, giving current shareholders an extra boost to their total returns.
Sasse has convinced shareholders of his ability and commitment to his fund and won the press over with his accessibility, openness and candour.
There is also depth of management and entrepreneurial skills in IPG under chairman Sam Hackner and MD Sam Leon. But management will come under increasing pressure from investors to become internal.
Growthpoint is likely to grow distributions by an average 11,5% a year in the next two years, which is at least in line if not marginally better than the average expected for the larger funds in the sector.
In spite of a 40% increase in net asset value per share in the past year, valuations on Growthpoint's mainly A-grade portfolio look attractive compared with replacement cost.
The average valuation of the retail portfolio is R8 440/m² with net rents of R65/m², compared with replacement values of R14 000/m², increasing by about 15%/ year, and net rent of R100/m². The industrial portfolio is valued at R1 820/m² with net rent of R16/m², compared with new builds at R3 000-R4 000/m² at rents of R30-R35/m². These large value gaps should underpin existing building valuations and rents.
Important properties owned or part-owned include Brooklyn Mall, The Kolonnade, Northgate, La Lucia Mall, Waterfall Mall (Rustenburg) and the Investec buildings in Sandton and Cape Town.
Growthpoint should be a core holding in any listed property portfolio.
