Episode Transcript
The Finance Ghost: Welcome to episode 272 of Magic Markets. All of the public holidays are out of the way in South Africa. Yay for entrepreneurs! Boo for anyone working in corporate who gets to enjoy that day off without worrying too much.
Personally, I'm quite happy that this December-lite is behind us, because now things will actually start to happen again in South Africa.
Moe, welcome to the show. This week we're going to talk property, and I'm certainly looking forward to doing that.
Mohammed Nalla: Indeed, Ghost. The rest of the world keeps on going, even though South Africa has been on holiday. I always love getting past these April holidays, certainly in South Africa, because like you say, it's almost as though the year starts now. So hopefully we see some of that activity kicking in.
We've not taken a break though, so Magic Markets has continued throughout this entire time period. We hope we've brought you some interesting content. And this week: property. That's a very chunky topic. So, Ghost, where do you want to take this discussion?
The Finance Ghost: Well, funnily enough, of the two of us, you are still the buy-to-let holder, I think sometimes begrudgingly so. So, property is obviously an asset class that has always meant something to you, and we certainly know that from prior discussions.
So maybe we can just start there - with why property appeals to you. Then we'll dig into some of the ways to do that in the listed markets, and just some thoughts around that. Locally, and abroad actually.
Mohammed Nalla: Ghost, maybe as a caveat, right - I think my exposure now to listed property is probably larger than my exposure to buy-to-let. And that's for a number of reasons.
Listed property gets you the same kind of appeal as physical property, but you get liquidity. You get external management, you get balance sheet leverage, and we can unpack some of that.
But in a nutshell, for me, property is interesting for a number of those reasons, because it gives investors a combination of income - that’s obviously a big appeal - it gives you the hard asset backing. For someone who’s slightly more old-school, like me, that's quite important.
And then it also gives you the equity upside. So, I think the important point to note here, (certainly for a lot of people, me included) is that property might behave a lot like a bond, but it's not a bond.
Because, yes, you get the recurring income, but in many cases, you also get some inflation linkage, that comes through in rental escalations over a long period of time. Certainly if you're holding this through cycles.
And then you've got the real assets sitting underneath that listed vehicle. So, listed property is still equity - but management matters, the stuff we look at when we're covering any listed company out there, matters. Balance sheets matter. Asset selection and asset allocation matter a lot, as does access to capital, certainly in high growth sectors like data centres. And I will unpack that.
And the thing is that when things go wrong, it's generally still the equity holder that's taking pain. So, in order to frame it properly, you've got to look at it in terms of saying you're getting the income, you're getting the asset backing, you're getting the operational leverage.
But if you get stuck with a bad property company, just like in the buy-to-let physical space, then you just end up with a lot of debt and some tired assets. And that distinction is really quite important, because often investors look at property through that lens of yield.
They see a high dividend yield, and they say, “Hey, this might be attractive”. I would say in the property sector specifically, sometimes that high yield being a value trap, or a warning, is certainly very relevant.
And I would always keep that in the back of my mind - because I would rather own a lower yielding property company with good assets, strong occupancy, and decent balance sheet - than owning something that has a high yield and chasing that yield.
Now, if you look at this globally, as you've indicated, the property market has changed quite dramatically. It's not just, “Hey, we're buying REITs, we're buying property as an asset class”. You're getting very direct exposure to specific themes.
And one of the themes I want to unpack on the show today would be senior housing. That's massive up here in North America, as we've got an ageing demographic.
Then logistics. We've covered some logistics property companies in Magic Markets Premium before. Then data centres, with the kind of AI build out that we're getting, that's absolutely massive. And then the old favourite, retail: you've got to look at retail, and what's happening in that space.
And all of that's wrapped up in this overarching narrative of: if rates are going lower, you’ve got to buy property. I think it's a lot more complex than that, because it's not just a rates trade, it's also a thematic trade underlying that.
And so, you've got to have a look at what you’re actually getting exposure to and then layer on the company analysis that we usually do in other sectors, as well.
The Finance Ghost: Yeah, absolutely. So, I'm certainly not a buy-to-let enthusiast, but I do have a bunch of REITs in my portfolio, particularly in my tax-free savings account. And I'll speak about the local ETFs now.
I just find they do such a good job of being somewhere between fixed income and equity risk, and with a nice long-term lens. Especially at the moment, with so much uncertainty around AI - it just feels like so many business models are at risk at the moment.
And property is changing too. You've highlighted a few there. Data centres, what's happening in retail, etc. These themes do have an impact, but it always feels to me like at least I'm buying something that has a little bit more resilience.
Let’s look at some of the local ETFs then, and specifically the kind of things that you could hold in your tax-free savings account in South Africa.
Obviously, it's a really popular option for investors, and with very good reason. These are diversified structures. It's low-cost exposure, limited headspace - I'm not having to worry about collecting the rent and getting phoned when the tap is not working. The stuff just sits there on the market.
You can have it in your tax-free savings account. Why does that matter? Because REITs pay taxable dividends. They are taxed as income tax, not as dividends. So, they are taxed at your marginal tax rate, which is typically much higher than your dividend tax rate (or certainly will be for most Magic Markets listeners).
And that means you are really maximising the advantage of a tax-free savings account if you go the REIT route. Or at least you're giving yourself a good chance of maximising it.
But you've got to be really careful with which ETFs you buy, because they vary dramatically, based on which index they actually track. So, I'll just give you three quick examples.
Satrix Property ETF is one of them. They've got NEPI Rockcastle at over 10% of the fund. Redefine Properties is at 9.9%, Growthpoint very similar. Vukile Property Fund is the fourth largest holding, at 9.5%.
So, you can see very even weightings here, among the four biggest names. And all of them will bring you some degree of offshore exposure.
Something like NEPI Rockcastle is pure offshore. Vukile’s got big chunky offshore, and then it varies as you look at some of the other names. So that is one of the nuances of the South African market: you're buying a local property ETF, or local REITs if you just go the single stock route, but you're getting a lot of look-through exposure to places like Poland and Spain.
That's why it's such a popular diversifier of wealth. It's also why institutions love it, because they can actually get their money offshore effectively, through this local structure.
Looking at another example of an ETF, the 1Invest SA Property ETF is very different in terms of weightings. So, check this out. NEPI Rockcastle is at 21.3%, Growthpoint 15%, Redefine is at 11%, Vukile is at 8%. So that's over 50% of the fund across just those four names.
Completely different weightings to the Satrix one that we just looked at. And that's because it's not tracking a capped index. So, you've just got to look very carefully at the fact sheet when you invest in any of these names.
10X SA Property Income ETF is another one. There, Vukile is not even in the top 10 at all, based on the latest fact sheets. So again, read the fact sheets when you're going to buy these ETFs.
And Moe, we've actually seen additional interest locally, in global property feeder ETFs. Satrix recently listed one. Names like Welltower, Prologis, Equinix and Simon Property Group are all in the top four names there.
Notably, that's an accumulating ETF, from what I've seen. So that means it doesn't actually pay out distributions, instead it just rolls it and keeps reinvesting it. So that's quite interesting. That's basically a Net Asset Value (NAV) play. If you're looking for dividend income, that would clearly not be an ETF that would tick that box for you.
So again, getting to the detail: as much as ETFs are an ‘easier’ way to invest than single stocks, you still have to go and read the fact sheets, otherwise you're not going to know what you're actually buying. And you can end up getting something that's very different to what you actually thought you were getting, right?
But it is interesting to see the interest from South Africans in these offshore feeder ETFs, because in your neck of the woods, Moe, there are some pretty big property companies, aren't there?
Mohammed Nalla: Yeah. I find it so interesting that the South African demarcation is less on the thematic kind of lens than it is geographic. I guess that makes sense because the South African property market is comparatively a lot smaller - maybe you don't get that clean thematic play at scale. And that's why those feeder ETFs have pulled out certain thematic leaders.
I'm glad you've mentioned those names, because those are exactly the stocks that I want to talk about in their respective sectors. They are the leaders. And I think that's really the point - when you go global, you actually can invest directly in the stocks without having to buy the ETF, and then get the kind of thematic exposure that you want.
So, I'm going to run through this section by section, or theme by theme.
Let's maybe start off with senior housing, because I think that's really a strong sector up here. And if you look at the key player in the space, Welltower (that's a name that you mentioned): they're up 16% on a year-to-date basis.
I would say that's the stand-out listed name in the senior housing sector. It is a stock that we did cover in Magic Markets Premium. So go and have a look at that report if you are a subscriber.
But the basic thesis is actually quite simple, because it's around ageing demographics, and there's constrained supply. And if you smash those two together, there's a strong underlying demand story in the market. That's what makes Welltower really quite interesting.
Now with Welltower, one of the reasons why they're relevant is that they’re strong in the US, UK and Canada as well. And it's not just passively collecting rent - they've identified this niche, and so they want to try and actively consolidate that senior housing opportunity at scale, layering on some of the operational advantages.
I'm up in Canada, and it's quite relevant here, because they recently acquired a Canadian company here. It was a major senior housing portfolio acquisition.
It shows you how the company is using its balance sheet and its access to capital (deep liquid US capital and global capital) to effectively scale into geographies where their business model and operating model make sense.
And that's the key point for me. Welltower is not just about yield. It's actually a proper capital allocation platform and they are a global player. So, I quite like that.
And if you're looking for exposure to this specific theme, Welltower has indicated that they can go out there, they can go and find a pipeline of value-accretive deals, and they've got a proven track record behind them.
Now I want to move on from senior housing into data centres, another massive theme. I mean, we're covering tech stocks. We're just in the middle of earnings season right now. And the one common theme is: if you look at the capex amounts that are being spent out here, a lot of that is going into data centres.
If you are interested in the AI theme but you want some of those benefits (of being in real estate) - so that might be yield or the underlying hard assets - then you want to look at the specific theme within the property sector.
You mentioned Equinix; I think that is the standout performer - up 42% on a year-to-date basis. So that's a great reason to have a look at them. And Equinix is really at the centre of this data centre build out. Because it's not just data centres, it's effectively the entire digital infrastructure.
This company sits at the nexus of cloud computing, enterprise networking, and the AI workloads. But there are lots of complexities that come into this, and that's why you need a strong player with a strong operational track record.
Because you've got to look at issues like power availability; water availability for cooling down those data centres.
And I think a determined, very well-grounded player like Equinix, with a track record, is attractive. But now the problem in this space, Ghost, is that it's a very capital-intensive space. So, what I'm looking at here is: what has Equinix done recently?
And again, with a bit of Canadian link, they've recently partnered with CPP Investments, (that's effectively the Canadian government pension plan) on a transaction that gives them exposure to data centres in the Nordic regions.
So, you're seeing the same playbook that we saw with Welltower. It's got a strong operational background, and they're leveraging their access to capital into other global geographies. And I think that's really quite an interesting play on this theme within the overall retail sector.
Then I want to quickly go into the other two buckets we've mentioned. One is logistics. Logistics, I would say, is less exciting than data centres. The biggest player here would be Prologis, which is up about 10% on a year-to-date basis. Again, it’s a strong company. We covered it a long time ago in Magic Markets Premium.
The long-term story here was really around eCommerce and supply chain resilience. You've got reshoring or near shoring, in the US. But the problem that I have with the sector - and why it's been a bit of a laggard – was that we had the super cycle during COVID, as we had this boom in eCommerce. And you saw all of that come through.
And so that meant demand surge. You had this massive rise in rental growth. And then investors just got really excited about it and potentially overpaid for some of those assets.
So, I don't think the theme is broken here. Prologis is still a very high-quality business, with a strong balance sheet. But you see very different themes emerging within these sub-themes. When you're looking at Prologis, it’s certainly less flashy than the capex spend that's coming into the data centre space.
But it's really about paying attention to what multiples they are paying for any growth that they're bringing onto the balance sheet. In this particular theme or subset, it's really about discipline.
Lastly, Ghost, I’m wrapping up on retail, because retail is a really big sector. It used to be the favourite sector. It's a lot more nuanced than people think, right?
There's a lazy view: retail property is dead, malls are dead. You look at all these zombie malls in the U.S. I don't think that's right. And a player like Simon Property Group has proven that. They’re up around 9% on a year-to-date basis, but they are still one of the A-grade.
Simon Property Group owns some of the best malls in the US, and in Canada as well. That shows you that retail is not dead at all. It's really about access to capital markets.
Can a company like this (where maybe you're not in the kind of growth that you're seeing in data centres) refinance their maturities as their debt starts to come through? Here, it's about sustaining the balance sheet, making sure that it stays healthy through the cycle.
And if you look at some of the capital raises that happened in this particular space, you can see that Simon Property Group raised some money. I think they paid between 50 and 100 basis points above the US Treasury curve. So those are still very attractive rates in terms of the company raising the money there. And this is as they try to survive what has been a slightly tougher market.
For me, the thesis on retail is that it's not a blanket idea of, “Hey, avoid the sector, let's all jump into data centres”. It's about choosing quality over some of the weaker names in that sector.
I think that's a very quick run through on some of the key themes. You can see how capital allocation is the core theme in some of those sectors, whilst in other sectors it's around access to capital, and chasing that growth. Just make sure you don't overpay for that.
The Finance Ghost: Thanks Moe. That's a really great whip around some of those big US names. Fantastic.
I love the point around lack of thematic exposure on the JSE, versus geographic. I mean, that's exactly right. We don't even have a retail index on the JSE, remember. It's something I've lamented many times, and we always talk about how the industrial index is basically the polony.
So yes, we don't have a lot of thematic REITs, although there are a few. So, Stor-Age, that's one. That's self-storage. And then we've got stuff that is like a geography within a geography, if that makes sense. Spear REIT is one example. They are exclusively focused on the Western Cape, which has obviously been a great growth area.
But yeah, inevitably all of these funds end up with all kinds of exposure across industrial, retail, and a little bit of office. Some of them get involved in residential, actually. All sorts of interesting things.
But there's one thing that is true across the board, and that is that you need to keep an eye on the capital-raising activity in the sector. And that's where I think we can bring this podcast home.
So, what are you looking for in terms of red flags here?
First thing, if you read SENS announcements that are vague around the uses of the money - if they aren't telling you what they need the money for, it's because they don't need to tell you what they need the money for. And that means that it's just too easy for them to raise it. That is a red flag.
Another issue is pricing at a premium to the share price. So if a REIT can wake up in the morning and raise hundreds of millions, or even billions of rands, and they don't even need to give those shares at a discount to the institutional investors supporting that raise, then it tells you that the demand for the shares is very, very strong.
Obviously, there's a point in the cycle where demand is so strong that assets are then overpriced, and it's a really bad entry point for investors.
But perhaps the biggest of all the red flags is pricing at a premium to NAV. So, not a premium to the share price, because the share price will often trade at a discount to NAV. So, you can stall me at a premium to the traded price and a discount to NAV.
But if you are pricing a capital raise at a premium to book value, or at the book value, then it means that investors are not just throwing money at you based on what the existing portfolio is worth, but also based on an assumption about the sort of deals you can bring in the future.
And that is when things are just getting way too hot, where it's probably time to reduce exposure. That, by the way, is part of why I love owning this stuff in a tax-free savings account. Because if I do need to reduce some exposure, reallocate funds elsewhere, I can get out and get back in, et cetera, and not incur any capital gains tax along the way.
As a final point from me, I recently did a survey in Ghost Mail on the property cycle. Moe, you'll find this interesting. 57% of respondents believe that property is climbing but caution is needed. 33% believe we are already at or near the top. That's a third of people reckoning that the top is in, so that's significant.
Only 10% said “long way to go”. Personally, I'm in that 57%. I think property is still climbing but you need to be cautious. So, I'm happy to stay long, but I must say I'm not throwing tons of new money at the sector, and I’m certainly keeping an eye on those capital raises.
I don't want to be involved if what happened 10 years ago starts to happen again -because it can easily become a bubble on the JSE.
Mohammed Nalla: I think those are valid points, right? At the end of the day, globally, the cycles are slightly different to what you're experiencing down in South Africa.
I think your capital raising point is really quite important, and I've outlined where some companies like Simon are raising in the debt markets, it's really around the cost of that debt.
Others have found innovative ways to stretch their balance sheets. Partnerships with pension funds, long-term patient capital, certainly in the very capital-intensive sectors like data centres.
So, I think you get subtle nuances in the sector that are really quite important to pay attention to. Your premium-to-NAV point is really quite powerful, because it can actually give these properties (or the property companies) access to cheaper equity currency, if you want to call it that.
But it can become dangerous, because that's when your capital discipline could disappear. Management might just start doing deals because they can; they've got access to this cheap capital, and not because the deal actually makes a lot of sense.
And then just wrapping that up in an overall macro point, it's more than just “are rates going to be cut?” - that is a macro driving force, you’ve got to pay attention to that, but I think the points I've made around quality are quite important.
And in South Africa, as you've mentioned, you've got to read the labels very closely, right? You've got to actually pay attention. What are you getting geographically?
I think the same thing applies globally. Two property companies can look very similar on screen; could have the same thematic exposure; they could have similar yields. But you’ve got to pay attention to what's happening with the assets. What's the quality of the balance sheet? What does access to capital look like, and how much are they paying for that?
And so that goes beyond just buying the yield. You've got to understand the businesses, the balance sheets, the assets, and how management is allocating that capital on your behalf. Because that's really where the difference shows up over time.
I like the sector in general. I do have exposure. I have been a lot more selective. I've bounced that around.
So, for example, I've had an early entry point into the industrial sector that did really well. My current running yield on that investment is absolutely massive. But even then, I've recycled capital out of that. I've taken some profit off the table, simply because of these nuances, and some of those thematics that are starting to come through, that are leading to quite a bit of dispersion in the global REIT sector.
If you have a look at the performance, how some of them (even the bigger, stronger names) have performed, you can actually see that you wanted to be in the data centre space. Maybe you wanted to be in the healthcare and frail care space.
Retail has been a bit of a laggard, but that doesn't mean you shouldn't have any exposure there. I would say, go for quality there - rather than just a blanket exposure.
The Finance Ghost: Fantastic Moe. We're going to leave it there this week. That's a really nice look at property.
Thank you to our listeners for joining us. Please do come back next week, where we will bring you some more insights into the markets, as we all learn together week in and week out here on Magic Markets.
Mohammed Nalla: Thanks so much, Ghost.
To our listeners, let us know what you thought of the show.
Hit us up on social media. It’s @MagicMarketsPod, @FinanceGhost and @MoehammedNalla, all on X. Or you can find us on LinkedIn. Pop us a note on there.
Until next week, same time, same place, thanks, and cheers!
The Finance Ghost: Ciao.
