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Capital Markets

South Africa: Property companies take a shine to Johannesburg

Tax regime to encourage market; JSE outstrips national growth.

The South African real estate investment trust market is set for a very strong 2015, according to Nicky Newton-King, CEO of the Johannesburg Stock Exchange.

nicky newton-king-160x186
Justin Barlow

 Closer technical relationships is one way in which we aim to support other bourses in the region

Nicky Newton-King,
JSE

Over the last three years, a total of 19 property companies have listed on the JSE, seven of which are based offshore. 

“Out of the 24 listings we had on the exchange in 2014, eight of them were Reits and one was from a German-based property company,” says Newton-King. The influx of foreign and local domiciled real estate companies listing on the bourse is expected to continue this year.

“We have seen increasing interest from foreign-domiciled property companies listing on the JSE and we believe this will be an upward trend.” 

In December last year, German based Sirius Real Estate Limited listed on the JSE’s Alternative Exchange (AltX). This is a secondary listing for the German company, which is also registered on the London Stock Exchange’s Alternative Investment Market.

“This highlights two things for the Reit market in South Africa,” says Newton-King. “Firstly, the appeal of the JSE for property companies at the global, as well as the local, level and South African appetite for Reits, which are performing well due to exposure in high growth environments.”

Legislation

This trend has also been influenced by the introduction of Reit tax legislation in 2012, which streamlined previously confusing legislation over property listings, brought legislation in line with international standards, and introduced certain tax incentives to encourage listings. For example, under new legislation Reits listed on the JSE will be exempt from capital gains tax until shares are sold. 

One of the consequences of loose monetary policy in South Africa, and globally, has been asset market inflation, including in the real estate market in South Africa. “In some areas, property prices have doubled in the last four years, so the environment is great for Reits,” says Chris Becker, CEO of African Alliance, in Johannesburg.

Overall the performance of the JSE has been strong. As well as the 24 new listings on the JSE, the bourse raised R153 billion ($13 billion) and R251.5 billion in equity and debt respectively, up from R93 billion and R215 billion in 2013. Headline earnings per share on the JSE in the year ended December 2014 increased by 14% to 735c and group earnings after tax for 2014 increased by 25% to R634 million from R507 million in 2013.

Rate hikes in the US are pretty much priced into markets, but even so, I don’t expect Fed rate hikes anytime soon

Chris Becker

This comes despite a woeful economic performance in South Africa more generally. GDP growth for 2014 reached 1.4%, according to the World Bank, and expectations for 2015 were revised down by South Africa’s minister of finance in February’s budget from a previously projected 2.5% to 2%. 

“It’s unsurprising that growth on the exchange has outstripped national growth. The exchange is home to a number of large, global businesses including the likes of Glencore Xstrata and BHP Billiton. The strong performance on the JSE is a reflection of the global success of these companies, and not just a reflection of what is happening in South Africa,” says Newton-King. 

“This is the case with Reits in which we are seeing a clear, positive trend: it is a consequence of success in the sector, not just the underlying economy,” she says.

Indeed, slow economic growth at home is encouraging South African companies to look further afield for profit. One of the latest real estate companies to do so is Rockcastle Global Real Estate, a company listed on both the Stock Exchange of Mauritius and the JSE, which plans to raise R1 billion in a share placement to fund developments in Poland and Zambia. This development is providing a further boost for the stock exchange.

But that is not to say that the JSE will be immune from shocks once the Fed decides to raise rates. “When the Fed begins to hike interest rates in the US, the macroeconomic impacts this will have will affect the JSE and we will need to monitor the nuanced effects this will have on us,” says Newton-King.

But as Becker says: “Rate hikes in the US are pretty much priced into markets already, but even so, I don’t expect Fed rate hikes anytime soon.”

Further reading

 

Real estate survey 2014:
Results index

He continues: “In my view, it is likely we get QE4 before rate hikes, which is further supportive of Reits. Also the South African Reserve Bank has already said it won’t hike policy rates further from here, and that was despite the Fed planning to hike rates. If they manipulate South African rates lower or keep them unchanged, it will further fuel asset inflation and Reits.” 

While the JSE thrives in its home market, fledgling exchanges in sub-Saharan Africa remain off the radar, suffering from a lack of liquidity and sophistication. 

“There are currently 24 exchanges on the African continent and most of them aren’t liquid enough for proper flows. Closer technical relationships is one way in which we aim to support other bourses in the region,” says Newton-King. 

In January, the JSE announced a partnership with the Nigeria Stock Exchange (NSE) to create more opportunities for investors and companies in African capital markets

“Nigeria is a hugely important part of the African growth story and working on initiatives together to improve the exchange in Lagos is important for us. While there have been few specific outcomes of our collaboration with the Nigerian exchange as yet, we have had some good conversations,” she says. 

“As an exchange, be that in South Africa, Nigeria, or any where around the world, we do not have a divine right to exist. We are here to facilitate the development of the capital markets and be used as an instrument for investors. So it is important that we collaborate across the continent.” 

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