Amidst talk of a possible perfect storm circling the listed property sector, the second largest JSE listed property fund Redefine Properties is oozing confidence.
That is largely due to a move started five years ago. Redefine has diversified more aggressively than most of its peers to offshore markets. This has resulted into an into an ideal rand hedge position for the current volatility.
Redefine’s rand hedge position is succinctly communicated in the reflections of its CEO Marc Wainer in his latest column titled investor insight.
Wainer wrote that “As an emerging market, our economy remains more volatile than established markets. It is sensitive to movements in the global economy, commodity prices and driven by sentiment. Facing the unwelcome potential of a South African sovereign risk downgrade underpins sentiment.”
Talk of a possible downgrade of South Africa’s sovereign risk is something which worries many observers. The worries are more prevalent in the listed property sector. Such a downgrade would possibly make last year’s volatility within the listed property sector look like a picnic. This is because a downgrade would hit bond yields and the listed property sector yields maintain a remarkable correlation with bond yields.
Wainer said “In the current economic context, the Australian and UK property markets offer better initial yields on acquisitions than those available in South Africa, coupled with less risk. These markets also offer lower costs of funding.”
He added “Thanks to our offshore investment strategy, through Redefine International, Cromwell and investing in a north Sydney property (Northpoint) directly, we have benefited from the fairly severe Rand depreciation (particularly against the British Pound). As a consequence these investments are proving their value as prudent Rand hedges.”
Redefine said Wainer has been investing offshore for the past five years and last year the benefits of this investment began coming through. “This year the advantages have been substantial for Redefine, with our offshore holdings accounting for 15% of assets, but more impressively 20% of distributable income.”
“At present currency levels, Redefine’s 36% holding in Redefine International, the investment in Northpoint, as well as its holdings in Cromwell — 12.8% direct and a further 13.2% indirectly through Redefine International — have delivered significant additional income for Redefine. This provides a cushion that offsets the surprise 50bps hike in local interest rates and unexpected rates and taxes increases, which are excessive.”
“Sustained economic challenges will make 2014 a challenging year. However we remain confident that our local and international strategies will continue to produce sustainable performance for our investors and benefit unitholders in the long term,” said Wainer.