South Africa: Growthpoint chooses risky moment to enter UK market
Whether Growthpoint can turn its purchase of UK shopping-centre owner Capital & Regional into a success will depend on factors that South Africa’s largest real estate investment trust won’t be able to control.
Growthpoint this month agreed to buy a 51% stake in Capital & Regional for around 150mn pounds.
It will offer Capital & Regional investors 33 pence per share for a 30.3% stake – double the company’s share price before the deal was announced. Growthpoint then plans to subscribe to new shares at 25 pence each to give it a majority stake.
The central problem for Growthpoint is the sluggishness of the domestic South African market.
This has resulted in “fairly muted growth” within its core portfolio, says Pranita Daya, real estate analyst at Anchor Stockbrokers in Johannesburg. The company has “outgrown the home market” meaning it has to look for opportunities abroad, she says.
- The company already has assets in Australia, Romania and Poland.
That need to expand abroad exposes the company to the risk of overpaying.
- The potential synergies which Growthpoint expects to extract from control over Capital & Regional, such as a platform from which to expand further in the UK, justify a premium, Daya says.
- But the average offer price of 28 pence per share for control “definitely seems stretched.”
- If Growthpoint needs to make a new, higher offer, “they are likely better off not proceeding”, she argues.
The price being paid is a 29% discount to the post transaction net asset value (NAV) of 40 pence per share, says Patric Ho, head of absolute return funds at Mergence Investment Managers in Cape Town.
That discount, he says, is “relatively small” compared with prevailing discounts to NAV of over 50% for UK retailers Hammerson and Intu.
UK retail property prices have come under pressure as a result of the high penetration of e-commerce, Daya says.
- Valuations will remain “vulnerable” until bricks-and-mortar and online retail can stabilise towards an omni-channel structure that combines both formats to serve the customer, she argues.
Still, UK retail is “probably closer to the bottom of the cycle” and Capital & Regional’s assets have performed better than regional shopping centres in recent years, due to their convenience “every-day” retail offering.
- Growthpoint’s management team have the skills and expertise to turn Capital & Regional into a profitable investment, she argues.
Brexit compounds the risks. Property investors in the UK have been forced to adopt a “wait and see” approach, PGIM Real Estate says in research published in May.
- There has been a “clear rotation away from the UK,” with property investment volumes significantly lower in the final quarter of 2018 and the first quarter of 2019 as negotiations foundered.
- UK commercial property faces “the prospect of a severe correction” in a no-deal Brexit scenario.
- Yet, PGIM says, UK property could outperform if the Brexit picture finally clears.
- According to Daya, Growthpoint is “taking a risk in terms of entering the UK when the British pound could weaken much further on a poor Brexit deal.”
Capital & Regional’s debt, which currently stands at 400mn pounds, adds to the risk of the transaction, Daya says. Decreasing property valuations mean that gearing has been continuously pushed up, even without Capital & Regional taking on additional debt. Growthpoint has signalled that it wants to get Capital & Regional’s debt down in line with its own ratios, but Daya sees a risk that gearing could still rise further.
Ho at Mergence argues that the acquisition is “relatively low risk and opportunistic” and “may well be timed at the bottom of the cycle. The size of the transaction is not large and Growthpoint can easily provide further capital in future if required.”
Bottom Line: A full price and Brexit risks mean that Growthpoint’s UK venture could turn out more expensive than planned.