Redefine 'is not compelled to buy'

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BusinessDay TV (BDTV): Redefine is beefing up its office portfolio‚ putting up R4.1bn for Leaf Capital's nine property assets‚ largely in the Western Cape and Gauteng. The deal‚ which offers Redefine an initial income yield of 8%‚ will be funded through a combination of debt‚ a placement of shares and existing cash resources.

Of course‚ that is one of the transactions that's on the table. The other‚ Redefine purchasing a German portfolio through joint venture Redefine International as well. Marc Wainer‚ executive chairman of Redefine Properties joins us now in the News Leader studio.

Marc‚ it seems like it's a deal a day in the new year. Let's start off with what came through yesterday with the acquisition of Leaf Capital for about R4.1bn. Reports say that this could be interpreted as a vote of confidence in SA's premium office space. Is it?

Marc Wainer (MW): I don't know if they have a vote of confidence in anything in SA's space at the moment‚ but certainly the premium office market is the best and‚ in our view‚ if and when the economy recovers‚ this is where we will see the greatest growth‚ particularly on the capital growth side. So rentals will take a long time to move‚ but if and when the market recovers‚ this is where we'll see yield compression in these kinds of properties‚ and our business is about total return.

BDTV: You do allude to the very difficult trading and business environment in SA right now‚ just how tough a growth market is it becoming in terms of building your portfolio of assets because you have struggled to find sizeable acquisition targets over the past year?

MW: Last year we did the Macsteel one‚ which was a very good one of R2.8bn. We are not compelled to buy‚ we are big enough‚ but if we see the right opportunities we'll buy them. And‚ as you say‚ a deal a day‚ these deals started in September/October last year ... they just happened to work this way. But it is tough across all sectors ... unfortunately at our manufacturing sector and industrial portfolio our tenants should be doing great. We've got QE (quantitative easing) in Europe‚ low inflation and‚ of course‚ they can't really do much without a reliable power supply.

BDTV: Yes‚ those are some of the challenges and‚ with that‚ you've had to focus some of your attention on offshore deals as well. So talk us through that and the German portfolio that you're buying into‚ with this joint venture with Redefine International.

MW: Okay‚ we've said last year and before‚ our first direct property investment was in Australia in a joint venture with Cromwell‚ a building called Northpoint‚ which has done very well for us. So where we can we prefer to buy direct property because the yield is much better than buying into the stock. Up until a year ago‚ we couldn't do that in terms of Reserve Bank policy‚ but we got over that so we can now do it.

We sourced and found this portfolio. We can't manage or assess properties in Germany but Redefine International can because they have a presence. They did the due diligence‚ we went through the whole thing and we bought it on about a 7.5% yield. On closing‚ we will refinance. Now the beauty of going into those markets is that there is not much growth ... we'll probably get about 1.25% -1.5% per annum growth out of the portfolio‚ but we're going to borrow 50% of the purchase price at about 1.8%‚ so you can see your cash-on-cash returns are huge.

We'll manage the growth through and also given the divergence which in your view would be an interesting one ... you're buying properties on 6.5%-7.5% yields‚ borrowing cost to us 1.8%. To the people in Germany‚ if you've got money in the bank in some instances you have to pay if you've got more than 5%. So we believe there will be yield compression ... that's just too big a gap.

BDTV: Mohammed (Nalla‚ from Nedbank Capital)‚ sitting next to Marc right now ... on the one side‚ you see some the investment appeal that's being put on the table‚ but on the other side‚ it's got to make you nervous ... the sentiment right now around the South African economy and business operating within it.

Mohammed Nalla: Not really and I tell you why I say this. I've been very vocal about my view around the offshore property market relative to the domestic property market. When you're picking up yields like that in hard currency‚ obviously ... locally if you look on a total return basis‚ there should be a higher growth multiple pricing relative to those offshore properties‚ but remember on the offshore exposure if you're a South African investor‚ you're also getting a rand hedge over and above that and we've seen that flavour really come through in terms of investor appetite‚ specifically maybe they were late to the party.

But over the course of the last 12 months or so that seemed ... (build) momentum ... that's why a player like Redefine has Redefine International. Some of their competitors are also playing in that space. Now one question for Marc‚ obviously you've looked at Germany ... that's very much core Europe. Some of your competitors are looking at slightly more peripheral Europe. Is that something that's on your agenda?

MW: No‚ we think ... and I'm quite nervous about the eurozone ... I'm not quite sure it's going to happen. We look at the economies and know they're all taking strain. The chance of deflation ... Germany is the strongest economy. We're still happy with the UK because I believe they're doing the right things.

I don't know what will happen post the election ... that we'll have to see. But Germany is a strong economy. We like it and we understand it as well because we've got people on the ground there. We don't want to go into new ... we are familiar with the tax structures‚ we're familiar with everything in Germany so we can't play everywhere.